We examine conditions under which a low cost vertically integrated manufacturer has an incentive to export an intermediate product to its higher cost (vertically integrated) rival rather than to vertically foreclose, fully cutting off supplies. The nature of supply conditions in the importing country, the size of an import tariff on the final good and optimal policy by the exporting country are all shown to be important for this decision. The exporting country may gain by taxing exports of the final (Cournot) product even though, under Cournot competition, an export subsidy is optimal in the absence of a market for intermediates. In this case, optimal policy also requires an export tax on intermediates, but the higher tax on final goods serves to divert sales to the more profitable market for intermediates increasing the extent of vertical supply. It is optimal to tax the export of both goods or to subsidize the export of both goods. It is never optimal to tax one and subsidize the other.

Excerpt from Equilibrium Vertical Foreclosure The competitive effects of vertical mergers have long been a source of controversy in economics and antitrust. This paper is concerned with vertical foreclosure, one of the central issues in that debate. Vertical foreclosure concerns the exclusion that results when unintegrated downstream rivals are foreclosed from the input supplies controlled by the firm that integrates. Analogous effects occur when unintegrated upstream competitors are foreclosed from selling to the downstream division of the integrated firm. While the foreclosure argument has been accepted in leading court decisions and policy guidelines, critics maintain that the theory itself is logically flawed. They claim that a vertically integrated firm will have no incentive to exclude its rivals, and if it did try to exclude them, rivals could protect themselves by contracting with other unintegrated firms. This controversy can be seen more clearly by making the vertical foreclosure theory more specific. According to the theory, a single vertical merger can disadvantage downstream rivals as follows. Consider a market in which the supply of inputs is competitive before the merger and there are no production efficiency benefits gained from vertical integration. After the merger, suppose the upstream division of the now-integrated firm refuses to supply inputs to the rivals of its downstream division. This foreclosure of rivals from these supplies means that remaining suppliers will face less competition. As a result, they may be able to increase their profits by raising their input prices to the unintegrated downstream firms. These higher prices benefit the vertically integrated firm. If rivals costs of inputs are increased, they will be forced to reduce their production and raise the prices they charge in the downstream market. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.com This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully; any imperfections that remain are intentionally left to preserve the state of such historical works.

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