Optimal commercial policy with quality-differentiated products

Abstract

This paper examines the optimal tariff policy for an importer of a quality-differentiated product when tariff levels are allowed to vary with the quality of the good. The deadweight loss due to changes in the matching of consumers to goods under tariffs is emphasized. It is shown that if the objective is to transfer income to products, there is a presumption that the optimal policy will require consumers to choose lower quality goods than under free trade (quality downgrading). If all qualities are improved, an ad valorem tariff cannot be the optimal policy.