OPTIMUM WELFARE AND MAXIMUM REVENUE TARIFFS UNDER OLIGOPOLY
| DOI | http://doi.org/10.1111/j.1467-9485.1991.tb00327.x |
| Date | 01 November 1991 |
| Author | David Collie |
| Published date | 01 November 1991 |
Srorrish
Journal
OJ
Polrfrcal
Economy.
Vol.
38.
No.
4.
November
1991
r
1991
Scoltish
Economic
Societv
OPTIMUM WELFARE AND MAXIMUM REVENUE
TARIFFS UNDER
OLIGOPOLY
DAVID COLLIE
Department
of
Economics, University
of
Warwick, Coventry
I
INTRODUCTION
A
well-known proposition in conventional trade theory is that the maximum
revenue tariff exceeds the optimum welfare tariff, this was shown by Johnson
(1951-52).
An
increase in the tariff beyond the maximum revenue rate will
reduce tariff revenue, and increase the price
of
imports which reduces consumer
surplus. This will have a negative effect
on
welfare, and hence the optimum
welfare tariff cannot exceed the maximum revenue tariff. Recently, trade
theorists have started to analyse trade policy in models of imperfect compe-
tition, see Helpman and Krugman
(1989)
for
a
survey
of
this literature.
In
an
oligopolistic industry, firms can earn pure profits and this provides
a
new argu-
ment for trade policy, a tariff can be used
to
shift profits from foreign to dom-
estic firms. The optimum welfare tariff under oligopoly has been derived by
Brander and Spencer
(1984).
The purpose of this paper is to show that under
oligopoly the optimum welfare tariff may exceed the maximum revenue tariff
due
to
the profit shifting effect. This can be shown in a homogeneous product
Cournot duopoly model with linear demand and constant marginal cost. It is
shown that the optimum welfare tariff may exceed the maximum revenue tariff
under quite reasonable conditions, for example, when domestic and foreign
marginal cost are equal.
I1
THE
MODEL
Consider
a
homogeneous product Cournot duopoly where
a
domestic firm with
constant marginal cost
cl
competes with
a
foreign firm with constant marginal
cost
CZ.
Assuming markets are segmented, then the domestic market can be
analysed independently
of
the foreign market. The domestic firm sells
Y
units
and the foreign firm sells
X
units
of
output in the domestic market. The dom-
estic country imposes a specific tariff
f
on
imports. Demand
in
the
domestic
Date
of
receipt
of
final
manuscript:
25
August
1990
398
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