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

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.