Department of Agricultural and Resource Economics

A low-cost foreign firm lowers its initially high price--dumping if necessary--until it drives the higher cost domestic firms out of business,whereupon it raises its price. At no time, however, does the foreign firm predate (price below its marginal cost). Tariffs, quotas, and other policies that mandate a minimum number of domestic firms do not qualitatively change the price path (high price, low price, and limit price). The optimal tariff in this dynamic analysis is lower than the optimal tariff in a static analysis (to allow consumers to take advantage of the low-price period).