Ad valorem tariff vs. specific tariff: Quality-differentiated e-tailers’ profitability and social welfare in cross-border e-commerce

Abstract

When consumers purchase imported products through cross-border e-commerce (CBEC), they actually pay for “product + import tariff”. In practice, import tariffs include ad valorem tariff and specific tariff, where the former is levied based on the price of the product, and the latter is levied based on the quantity of the product. Tariff adjustment has been a major concern since it can be a strategic decision for the government that plays a long-term role. Consequently, in this paper, we investigate the impact of tariffs on two e-tailers’ profitability and the government’s utility (measured by “social welfare + tariff revenue”) when the e-tailers sell substitutable but quality-differentiated products. We find the preference of the e-tailer selling high-end product follows a threshold policy that solely depends on the ad valorem tariff rate, while the preference of the e-tailer selling low-end product varies with the specific tariff rate, the ad valorem tariff rate, and the quality gap between high-end product and low-end product. Interestingly, we identify a quality update dilemma that distorts the e-tailers’ retail prices and sales quantities, which eventually alters their profitability performances with two tariffs. We further find that, there exist incentive alignment opportunities among the e-tailers and the government over the tariff policy, which improves the e-tailers’ profits and the government’s utility in the market. These results shed light on the government adjustment of tariff type to improve the policy effectiveness, and are theoretically among the first to study the impact of tariff type in the global operations literature.