Working Paper: NBER ID: w2920
Authors: Barbara J. Spencer; Ronald W. Jones
Abstract: We examine conditions under which a low cost vertically integrated manufacturer has an incentive to export an intermediate product to its higher cost (vertically integrated) rival rather than to vertically foreclose, fully cutting off supplies. The nature of supply conditions in the importing country, the size of an import tariff on the final good and optimal policy by the exporting country are all shown to be important for this decision. The exporting country may gain by taxing exports of the final (Cournot) product even though, under Cournot competition, an export subsidy is optimal in the absence of a market for intermediates. In this case, optimal policy also requires an export tax on intermediates, but the higher tax on final goods serves to divert sales to the more profitable market for intermediates increasing the extent of vertical supply. It is optimal to tax the export of both goods or to subsidize the export of both goods. It is never optimal to tax one and subsidize the other.
Keywords: vertical foreclosure; international trade; export policy; Cournot competition
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Low-cost vertically integrated manufacturer (L63) | Export intermediate products (F10) |
| Importing country's supply conditions (F10) | Export intermediate products (F10) |
| Size of import tariffs on final goods (F14) | Export intermediate products (F10) |
| Government policy (F68) | Profit margins for exporters (F10) |
| Government policy (F68) | Vertical supply (L14) |
| Higher profit margin from intermediate exports (F14) | Government policy increases vertical supply (R28) |
| Export policies (F68) | Firm behavior (D21) |