Optimum Welfare and Maximum Revenue Tariff Under Oligopoly: A Note

Abstract

In this chapter, we extend the work of Collie (Scott J Political Econ 38:398–401, 1991) and Wang and Lee (Res Econ 66:106–109, 2012), comparing tariffs, outputs, and welfare under optimum welfare and maximum revenue situations. Our main conclusions are as follows. Under no new firm entry or exit, the difference between the optimum welfare and maximum revenue tariffs is a decreasing function of the cost difference between a domestic and foreign firm. There is a cutoff value of the cost difference such that the optimum welfare and maximum revenue tariffs are equal, which determines rankings for tariffs, outputs, and welfare. Under free entry of foreign firms, the difference between the optimum welfare and maximum revenue tariffs is a decreasing function of the cost difference between a domestic and foreign firm. Again, there is a cutoff value of the cost difference such that the optimum welfare and maximum revenue tariffs are equal, which determines tariff rankings. However, under free entry of domestic firms with asymmetric costs, the optimum welfare and maximum revenue tariffs are equal.