Abstract
There is vast literature on the theory of optimal tariffs to maximize the economic welfare of a home country. The optimal tariff rate is positive in large countries, but the rate is zero in small countries. However, little attention, has been paid to the market structure in the concerned industries. Most of the literature focuses on a short run analysis or a long run analysis. In this paper, we present another concept of period, the intermediate run. In an intermediate run, each firm freely moves among industries, while the total number of firms in an economy is fixed.
To address this issue, we developed an international trade model suitable for explaining the intermediate run. A fixed number of oligopolistic firms operate and each firm can locate (operate) either in an importing industry or a non-traded industry. The two industries have an identical market size, each domestic and foreign firm has the same cost function and each industry engages in Cournot competition.
In this intermediate run model, the profit of each domestic firm is equalized in the two industries because each firm moves among industries to seek a higher profit. When free trade prevails in the importing country, domestic firms insufficiently locate in the importing industry from the economic welfare viewpoint. By imposing a tariff, more domestic firms locate in the importing industry in equilibrium, the resulting industry structure of the economy becomes more efficient and economic welfare is improved. Owing to this inter-industry movement of oligopolistic firms, observed only in the intermediate run, the optimal tariff rate becomes higher in the intermediate run equilibrium than in the short run equilibrium when the number of firms is fixed in each industry, that is, the short run.
JEL Classification: F12, F13, L13
