Munich Personal RePEc Archive

The Case for MFN under Asymmetries of Cost and Market Structure

Saggi, Kamal and Yildiz, Halis Murat (2005): The Case for MFN under Asymmetries of Cost and Market Structure. Published in: Canadian Journal of Economics , Vol. 1, No. 38 (1 February 2005): pp. 242-254.

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This paper constructs a three-country partial equilibrium model to examine the effects of the most favored nation (MFN) clause on equilibrium tariffs and welfare when exporting countries are asymmetric with respect to market structure as well as production costs. In the model, firms sell differentiated goods and compete in prices. We contrast two policy scenarios: one where the importing country is free to tariff discriminate among exporters and another where it must treat them the same (MFN). Relative to tariff discrimination, MFN benefits low cost (more concentrated) exporters and hurts high cost (less concentrated) ones. While MFN is generally preferable to discrimination from a global welfare perspective, such need not be the case when high cost exporters enjoy greater market power (because they are merged into a single unit) than low cost ones. Under such a situation, if cost differences between exporters are not too large then tariff discrimination favors low cost producers and is welfare preferred to MFN.

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