Strategic Input Pricing Under Trade Liberalization

ABSTRACT This study investigates the optimal uniform pricing strategy of an upstream monopolist supplying inputs to two downstream firms operating in different countries. When one country reduces import tariffs below a critical threshold, the upstream firm could strategically lower its input price to encourage exports from the other downstream firm. This price reduction increases all firms' profits and enhances consumer surplus and social welfare in both downstream markets. However, once trade is established, the upstream firm raises its input price in response to further tariff reductions, revealing a non‐linear relationship between tariffs and input pricing. This finding also applies to bilateral trade liberalization, provided that tariff rates in both countries remain low and comparable.