Optimal Tariffs with Partial Cross-Ownership in a Vertical Market: Uniform Versus Discriminatory Tariffs

Abstract This paper investigates the welfare impact of discriminatory tariffs and uniform tariffs in the presence of vertical cross-ownership. We develop a four-country three-firm model, where the upstream firm and two downstream firms with asymmetry are located in different countries. The results show that, regardless of the cross-ownership structure, the government of the importing country always tends to implement discriminatory tariffs to maximize domestic welfare. Second, the cross-ownership strategy of firms exhibits significant dependence on tariff policy. Under discriminatory tariffs, firms unanimously choose forward cross-ownership, while under uniform tariffs, firms prefer backward cross-ownership. Our results challenge the conventional view that uniform tariffs or MFN treatment are generally more favorable from the perspective of global welfare. Specifically, when the asymmetry is small, discriminatory tariffs may improve global welfare; conversely, when the asymmetry is large, uniform tariffs are more beneficial for improving global welfare.