Vertically Related Markets: Export Rivalry Between DC and LDC Firms

We present a model of export rivalry in vertically related markets where a DC firm produces a high‐quality good as well as a key input utilized by an LDC firm to produce a low‐quality export good. the DC firm acts as a Stackelberg leader by setting the price of the input and the quantity of its export good. We show that the DC firm's decision on vertical supply depends on the cost, demand, and quality parameters of both producers, and that the LDC government should tax either its final good exports or its key input imports.