TARIFF RATE PASS-THROUGH: BUYER POWER AND PRODUCT DIFFERENTIATION EFFECTS

A key tenet of economic theory is that the economic actor who pays the tax is not necessarily the same as the actor who bears the burden of a tax. Tariffs, like any tax, result in higher domestic prices. The question is whether tariffs completely pass through to domestic prices, or whether foreign producers will bear part of the burden. This study seeks to shed light on this issue by assessing how tariff rate pass-throughs vary with product differentiation and buyer market concentration. The study covers selected manufacturing sectors from 1996 to 2015, a period when tariff rates were declining. We find that tariffs pass through incompletely to import prices in more differentiated domestic product-markets. We also find tariffs incompletely pass through in more concentrated product markets, but tariffs will completely pass through in more commodity-oriented product-markets, as buyer market concentration increases.