Tariff and Quota Equivalence in Vertically Related Markets |
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| Authors: | Hong Hwang Kuo‐Feng Kao Cheng‐Hau Peng |
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| Institution: | 1. Department of Economics, National Taiwan University, Taiwan, and the RCHSS, Academia Sinica, Taiwan;2. Department of Economics, National Taiwan University, Taiwan;3. Department of Economics, Fu Jen Catholic University, Taiwan |
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| Abstract: | This paper re‐examines the issue of tariff and quota equivalence by introducing an upstream market into the Hwang and Mai (1988 ) model, and then allowing the two downstream firms to cross‐haul within each other's market. We assume the upstream monopolist can select either a two‐part or a one‐part tariff pricing strategy. It is found that if the upstream firm adopts a two‐part (one‐part) tariff pricing strategy, then the market price of the final good under a tariff will be higher (lower) than that under an equivalent quota; that is, the quota is set at the import level under the tariff regime. This result stands in stark contrast to the prior findings of both Hwang and Mai (1988 ) and Fung (1989 ). Moreover, if the quota rent is set as being equal to the tariff revenue, the social welfare under a tariff will necessarily be lower than that under an equivalent quota. |
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