Trade and Protection in Vertically Related Markets
Barbara J. Spencer
Ronald W. Jones
A domestic firm is partially dependent on a foreign vertically integrated
supplier for a key intermediate product when both firms are Cournot competitors
in the market for the final product. The foreign supplier generally charges its
domestic rival a price for the input that exceeds the independent monopoly level
and vertical foreclosure may occur. Domestic policies applied to the vertically
related products can increase domestic welfare by reducing the price and
increasing the availability of imported supplies of the input. Vertical integration
in the foreign supplier has significant implications for all three domestic policies
considered: a tariff or subsidy on imports of both products and a domestic
production subsidy. The foreign vertically integrated firm tends to reduce its
price for the input in reponse to an import tariff on the final product, whereas
a simple monopoly supplier would respond by increasing its export price. Also
domestic cost conditions for the production of the input can critically affect the
desirability of a tax as apposed to a subsidy on intermediate imports.
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