Abstract
This chapter studies the welfare effects of trade liberalization and the accompanied domestic profit tax reform in a vertical trading economy where oligopoly firms in a domestic final good market import intermediate good from a foreign monopolist and compete in either a Cournot or a Bertrand fashion. We show that if the initial protection level is relatively high, governments can ensure higher welfare for consumers and producers by raising profit taxes compensating for a decrease in a government’s revenue caused by a reduction of the tariff on the intermediate good. When the import tariff is already at a low level, the government may not be able to meet that policy goal.
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Notes
- 1.
We normalize the marginal utility of the numeraire good to unity.
- 2.
The level of the profit tax that maximizes the total revenue is infinitely close to 1. But we suppose that the role of the profit tax for the government is to make up the shortfall of the government revenue caused by the reduction of input tariff in order to keep the government revenue unchanged.
- 3.
The SOC is satisfied: ∂ 2 R C/(∂t)2 = − (n/2){2[2 + θ(n − 1)] − T}[2 + θ(n − 1)]−2 < 0.
- 4.
Hackner (2000) pointed out that when goods are complements and quality differences are large, low-quality firms charge higher prices under a Bertrand competition than a Cournot competition. In our setting, however, final goods are horizontally differentiated only and substitutes.
References
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Acknowledgments
We express our gratitude to Professor Ngo Van Long for his helpful comments. This research was financially supported by the JSPS Grant-in-Aid for Scientific Research (KAKENHI) grant numbers 15K03485and 18K0595. The existing errors are ours.
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Okawa, M., Iguchi, T. (2022). Trade Liberalization and Profit Tax Reform Under Oligopolistic Vertical Trade. In: Le Van, C., Pham Hoang, V., Tawada, M. (eds) International Trade, Economic Development, and the Vietnamese Economy. New Frontiers in Regional Science: Asian Perspectives, vol 61. Springer, Singapore. https://doi.org/10.1007/978-981-19-0515-5_3
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