DP1175 Vertically Related Markets and Trade Policy in a Bargaining Framework

Author(s): Larry Karp, Lucy Sioli
Publication Date: May 1995
Keyword(s): Cooperative Games, Multistage Bargaining, Strategic Trade Policy, Vertical Integration
JEL(s): C71, C78, F13, L22
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1175

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.