TRADE AND PROTECTION IN VERTICALLY RELATED MARKETS

We consider home country tariff and subsidy policies in a setting where a home firm is partially dependent on a foreign vertically integrated firm for supplies of a key input. The firms are Cournot competitors in the home market for the final product. We show that a tariff on final product imports may cause the foreign vertically integrated firm to reduce the price charged for the input under circumstances where a simple monopoly supplier of the input would increase its price. Supply conditions for the input significantly affect whether imports of the input should be taxed or subsidized.