Tariff De-Escalation with Successive Oligopoly
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In this paper, we explore the issue of a simultaneous reduction in tariffs at different
stages of a vertically-related market where each stage is oligopolistic. When
vertically-related markets are characterized as a successive oligopoly, reducing tariffs
by an equivalent amount on upstream and downstream imports will have a differential
effect on market access and hence profits at each stage due to a combination of
horizontal and vertical effects. As a consequence, in order to maintain parity between
the upstream and downstream stages in terms of changes in domestic firms’ profits,
tariffs on downstream imports should be reduced proportionately more than tariffs on
upstream imports. This provides a rationale for tariff-reduction formulae aimed at
reducing tariff escalation.