Vertically Related Markets and Trade Policy in a Bargaining Framework

We analyze the interaction of asymmetric industries in international vertically related markets. Each downstream finn bargains efficiently with its domestic supplier in a first stage and with the foreign supplier in a second stage. The asymmetry in upstream costs leads to interindustry trade. It can also cause vertical integration in the more efficient industry, and possibly vertical foreclosure. The latter occurs if competition in the final goods market is severe (the goods are close substitutes). When the more efficient industry is integrated, a tariff on imports of the final good stimulates interindustry trade of the input, but it may increase or decrease the market share of the domestic upstream firm. The effects of a tariff depend on the indusny configuration in the low-cost country.