Optimal Trade Policies Under Product Differentiations

Abstract

This article focuses on the optimal international trade policy considered product differentiations. A duopoly model with a home firm in a developing country and a foreign firm in a developed country is established. The findings indicate that, the optimal tariff relies on the product differentiations significantly. On one hand, higher marginal cost of home firms have opposite effects on optimal tariff compared to higher marginal cost of foreign firms. On the other hand, the optimal tariff is monotonically decreasing in the amount of consumers caring about brands and increasing in the scale of consumers not caring about brands. Moreover, an increase in the marginal cost and transportation cost of imported goods triggers price rising in domestic market as the market power of home firms is consolidated. In addition, a foreign firm may withdraw from domestic market if its competitive advantages vanishes under high tariffs.

Optimal trade policy and welfare in a differentiated duopoly

“…The analysis revealed that, depending on product differentiation, productivity variance, transportation costs, and competition modes, an easy or tight tariff policy can be optimal. In particular, product differentiation strategies are not always applicable in international trade, depending on competition mode and productivity variance, which is in contrast to Yang and Nie (2020). Furthermore, a similar result was obtained by Clarke and Collie (2006), with increases in tariff and transportation costs resulting in increasing prices for both home and foreign enterprises, regardless of competition structure.…”

“…Moreover, the order of games influences the strategic decisions of market players, which must be taken into account under imperfect competition. Therefore, instead of the price and static game adopted by Chen and Hong (2006), Fanti and Buccella (2021), Ghosh and Saha (2015), and Yang and Nie (2020), we established Cournot and Stackelberg duopolies with heterogeneous products to analyze how the market structure related to quantity affects the welfare distribution of different tariff policies under a duopoly. Second, for one enterprise, a high level of productivity can improve international competitiveness, further opening up new markets abroad (Essletzbichler & Kadokawa, 2010; Matsuura et al, 2003).…”

On comparing the profitability of horizontal mergers under Cournot and Bertrand competitions

“…1 1 A host of related issues have been studied in the literature. See, for example, Nie et al (2019), Yang and Nie (2020), Nie et al (2021), and Wang and Zhao (2022) for some recent studies.…”