Trade Intermediaries and the Tariff Pass-Through
We show how the pro-competitive effects of trade liberalization can be weakened by the market power of intermediaries producing distribution services. In a Cournot oligopoly model, where an homogeneous good is imported by trade intermediaries, who sell it to final consumers, the pass-through elasticity of the price with respect to the tariff is lower than one, but tends to increase with the degree of competition in the distribution-service sector. A tariff reduction increases the optimal mark-up of intermediaries, but allows a rise of their number. As a result, the long-run equilibrium mark-up, determined jointly by the maximum-profit and break-even conditions, remains unchanged. The pro-competitive effect of trade liberalization is entirely absorbed by the market power of intermediaries. On the other hand, a reduction in regulatory barriers limiting market access in the distribution-service sector translates into a fall of the fixed costs faced by intermediaries. The resulting new equilibrium entails a higher number of intermediaries and a lower mark-up. In short, the pro-competitive effect of trade liberalization can be achieved only if tariff reductions are complemented by open trade and competition policies in the distribution-service sector.