This paper re-examines the issue of tariff and quota equivalence by introducing an upstream market into the Hwang and Mai (1988) model, and then allowing the two downstream firms to cross-haul within each otherâs market. We assume the upstream monopolist can select either a two-part or a one-part tariff pricing strategy. It is found that if the upstream firm adopts a two-part (one-part) tariff pricing strategy, then the market price of the final good under a tariff will be higher (lower) than that under an equivalent quota; that is, the quota is set at the import level under the tariff regime. This result stands in stark contrast to the prior findings of both Hwang and Mai (1988) and Fung (1989). Moreover, if the quota rent is set as being equal to the tariff revenue, the social welfare under a tariff will necessarily be lower than that under an equivalent quota.
