Optimum-Welfare and Maximum-Revenue Tariffs in Vertically Related Markets

Yasushi Kawabata

Graduate School of Economics, Nagoya City University, Nagoya, Japan.

DOI: 10.4236/me.2014.55055                

Abstract

This paper compares the optimum-welfare tariffs with the maximum-revenue tariffs in a model of vertically related markets characterized by Cournot competition. It shows that the optimum-welfare tariff on the intermediate good exceeds the maximum-revenue tariff if the home intermediate-good firm is much more cost-competitive than the foreign intermediate-good firm. Further, the optimum-welfare tariff on the final good exceeds the maximum-revenue tariff if the home intermediate-good firm is significantly inefficient compared to the foreign intermediate-good firm. It is less likely that the optimum-welfare tariffs on the intermediate and the final good, respectively, exceed the maximum-revenue tariffs on the intermediate and the final good in the presence of vertical trade structures than in their absence.

Keywords

Optimum-Welfare Tariff, Maximum-Revenue Tariff, Vertically Related Markets, Cournot Competition

Conflicts of Interest

The authors declare no conflicts of interest.

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