Trade Protection with Two-Sidedness
The traditional model of trade protection against a foreign monopolist suggests that a home country should often impose a tariff on the foreign firm, even though this introduces an additional distortion. In this paper, I generalize the traditional model to include a basic network externality, e.g., the foreign firm also generates third party advertisement revenue from its product, and I determine that the network externality will result in a positive optimal tariff under a larger set of convex functions than in the traditional model. In this case, the firm has an additional gain from sales and so it is willing to bear a larger burden of the tax to maintain sales. Extending the model to include two-sided products (e.g., smartphones with consumers and app providers or video game consoles with consumers and game developers) leads to further results. With two-sidedness, the firm is able to alleviate some of the burden of the tariff through rent transfers from one side of the market to the other which makes a positive tariff policy optimal for these industries.