Strategic and rent extracting tariffs in the presence of persuasive advertising

This paper examines positive and normative implications of tariffs in the presence of persuasive advertising. It demonstrates that protection affects imports, the domestic consumer price and the terms of trade directly and through its effect on the level of advertising. If protection reduces advertising a Metzler paradox can occur. A tariff can be used to induce foreigners to allow entry. Jointly optimal tariffs and advertising taxes and the optimal tariff for the situation when it is the only available policy instrument are derived under both monopoly and Cournot oligopoly.

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