The Theory of the Multinational Firm: Optimal Behavior under Different Tariff and Tax Rates

Abstract

This paper explores the profit-maximizing strategy for a monopolistic firm selling to two national markets simultaneously. The choice of how much to produce and sell in each country, how much to export between the two, and what transfer price to put on intrafirm exports is shown to depend heavily on two considerations: (1) whether the marginal costs of production are rising or falling, and (2) whether tariffs are high enough for the firm to discriminate perfectly between its two national markets. After showing how the firm reacts to a given set of tariffs on imports and taxes on profits, the impact of a change in any policy variable is assessed.