Tariffs, Vertical Oligopoly, and Market Structure

We study the impact of market thickness on the optimal tariff in vertical specialization. We show that, in the exogenous market structure where the extensive margin is fixed and only the intensive margin responds to trade policy, when the Home optimal tariff is higher, the thicker is the Home final-good market (relative to the Foreign intermediate-good market). In the endogenous market structure where both extensive and intensive margins respond to trade policy, this relationship is overturned and as the Home optimal tariff is higher, the thinner is the Home final-good market. We also show that our analysis has an advantage of separately deriving the impact of tariffs on the extensive and intensive margins of homogeneous goods.