Analysis of the Competition and Tariff under Monopolistic Competition Condition

Under monopolistic competition condition, if countries do not employ tariff cooperation but tariff competition, they will choose their tariff level separately to maximize their society welfare. While each company will choose its sale in home and foreign market to maximize its profit. The number of companies in both countries affects the tariff decision of both governments. The optimized tariff of one country will rise with the increase of home companies´ number at the beginning and then decline with its number increase. Country with more home companies tend to set lower tariff than country with less home companies. The enhancement of tariff can protect home companies and market by increasing the sale of home companies and reducing import. Country with more home companies will gain a larger market share than other countries. At the same time, sufficient competition can expand the market capacity, although the sale of each company could drop, and reduce the price of products, which bring more welfare to consumers. In perfect competition market structure, tariff will nearly drop to zero, if government wants to optimize their society welfare as a whole. To obtain more benefit from international market, government should advocate competition of its home companies.