In Search of the Optimum Tariffs Under Third-Degree Price Discrimination

In Search of the Optimum Tariffs Under Third-Degree Price Discrimination

Tariff literature on third-degree price discrimination remains only lightly explored. The purpose of the paper is to investigate whether there exist optimum tariffs in the presence of different demand elasticities. We explore (i) the case of optimum uniform ad valorem tariff, and (ii) the case of optimum discriminatory ad valorem tariffs. A two-stage optimization approach is used: profit is maximized for a foreign firm in the first stage and importing country`s optimum tariff rates are determined under maximization of welfare (sum of consumer surplus and tariff revenue). The result indicates that the optimum tariffs may not exist even with a set of well-behaved linear demand functions. Consequently, computer simulations are needed with cost and demand parameters to ensure better welfare position for home country.