An analysis of the MFN clause under asymmetries of cost and market structure

We conduct a welfare comparison of MFN and tariff discrimination in an oligopoly model of trade between two exporting countries and one importing country. While MFN dominates tariff discrimination from a world welfare perspective when exporting countries are asymmetric with respect to either cost or market structure, such need not be the case when both types of asymmetries co-exist. In particular, when high-cost exporters are merged and the cost disadvantage of the merged unit relative to competing firms is of intermediate magnitude, tariff discrimination can be welfare preferred to MFN (even when the average tariff is actually lower under MFN).