Optimum tariffs for vertically differentiated products with an application to Indian tea exports

Abstract

Optimum export tariffs are typically related to the elasticity of demand for exports in homogeneous goods markets. In this paper we set up a simple model for large exporters of quality differentiated products and estimate optimum tariffs based on the quality of the good. Restrictions on demand parameters implied by the theoretical model are used in estimating demands for different qualities of Indian tea exports. We use the estimated model to find optimum tariffs for two qualities of Indian tea exports and find that optimum export tariffs for high quality teas should, on average, be 14% higher than the tariff on low quality tea exports.