Network externalities and tariff structure

Abstract

In this paper, we show that with cost asymmetry, stronger network externalities and less differentiated goods, the uniform tariff rate set by the government of the importing country increases and the optimal discriminatory-tariff gap widens. In addition, under network externalities and good differentiation, we demonstrate that: (a) the optimal tariff policy is superior to free trade in maximizing the domestic social welfare; (b) the maximum-revenue tariff rate is always higher than the optimal tariff rate; (c) the consumer surplus and social welfare are always higher under the optimal tariff policy than under the maximum-revenue tariff policy.