Multinational firm behaviour under different tariff and tax rates: effects from strategic interaction in the host country

Clive Jie-A-Joen*, LIE Sleuwagen

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

1 Citation (Scopus)

Abstract

Transfer pricing has typically been analysed within the context of monopoly markets, showing the
power of transfer pricing to raise profits. This paper takes a new perspective in introducing competition
in the host market of the multinational firm. It analyses how strategic interaction affects the
behaviour of an MNF under different tax and tariff rates. Furthermore, the paper examines how the
ability of the MNF to manipulate the transfer price affects the activities and competitive position of
the host firm which does not operate internationally. The results indicate that the type of strategic
interaction and the transfer price level play an important role in explaining the differences in the
corresponding optimization results of the monopoly and strategic interaction models. These differences
in results suggest major implications for the effectiveness of tax and tariff policies measured in
terms of their effects on consumer surplus, government revenues, the level of employment, and the
balances of payments of the home and the host country.
Original languageEnglish
Pages (from-to)65-89
Number of pages25
JournalEconomist
Volume145
Issue number1
DOIs
Publication statusPublished - Apr 1997

Bibliographical note

Funding Information:
* Tinbergen Institute, Erasmus University Rotterdam and Department of Applied Economics, Catholic University of Leuven, respectively. Direct all correspondence to: Clive (Jie-A-Joen), Tinbergen Institute Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands. Phone: +3110-4088939, Fax: +3110-4527347, E-mail: Jie@tir.few.eur.nl

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