Working Paper: CEPR ID: DP1175
Authors: Larry Karp; Lucy Sioli
Abstract: We analyse the interaction of asymmetric industries in international vertically related markets. Each downstream firm bargains efficiently with its domestic supplier in a first stage and with the foreign supplier in a second stage. The asymmetry in upstream costs leads to inter-industry trade. It can also cause vertical integration in the more efficient industry, and possibly vertical foreclosure. The latter occurs if competition in the final goods market is severe (the goods are close substitutes). When the more efficient industry is integrated, a tariff on imports of the final good stimulates inter-industry trade of the input, but it may increase or decrease the market share of the domestic upstream firm. The effects of a tariff depend on the industry configuration in the low-cost country.
Keywords: multistage bargaining; vertical integration; strategic trade policy; cooperative games
JEL Codes: C71; C78; F13; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asymmetry in upstream costs (D43) | interindustry trade (F14) |
| interindustry trade (F14) | vertical integration or foreclosure (L14) |
| tariff on imports of the final good (F14) | market share of domestic upstream firm (L71) |
| competition level in final goods market (D41) | vertical foreclosure (L22) |
| tariff on imports of the final good (F14) | interindustry trade (F14) |