On the Optimality of Escalated Tariff Structure: A Cournot Duopoly Analysis

Abstract

This paper examines whether an escalated tariff structure will maximize national welfare by using a simple Cournot duopoly model, where an intermediate good and a final good are vertically related. In this paper, some general results are derived. It is shown that the escalated tariff structure prevailing in most countries does not necessarily benefit an importing country more than a de-escalated tariff structure. The condition for an importing country to adopt an escalated tariff structure is a huge loss incurred by a domestic final-good producer resulting from a tariff imposed on imports of the intermediate good. A de-escalated tariff structure should be adopted by an importing country as a tariff on imports of the final good harms the domestic consumers much more than a tariff on imports of the intermediate good.