Location Theory With TariffsLast modified 28Aug00, comments are welcome, do not quote.
Department of Economics, 3016 Pamplin Hall
Dziepak "at" vt "dot" edu
Abstract: Tariffs are added to the traditional model of location theory, which create a discontinuity in the transportation costs. Equilibrium existence is characterized first with countries of identical size, then with a generalized border location. Also, a unit circle market space is considered. The tariff can be viewed as a toll, or an interruption of an otherwise continuous uniform distribution of customers, which greatly alters the outcome from the traditional models. An earlier paper by the author considering incomplete information results in identical equilibrium characteristics. Specifically, there exists a pure strategies price equilibrium for location pairs that are not too close nor too far apart, and all such equilibria exhibit location and price asymmetry.
Key words: Location, Hotelling, tariff.
* I am grateful to Helmuth Cremer and Jacek Prokop for comments.
Author's notes: This is an attempt to show a possible application of a result from the earlier paper (Spatial Competition With Incomplete Information) to a model of international trade. The effect of a tariff and that of the information solicitation cost are modelled identically and result in identical results with two interpretations.