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Subsidizing (and taxing) business procurement

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  • Asker, John
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    Abstract

    This paper studies the effect of a subsidy (or tax) on a market where a downstream manufacturer uses a competitive tender to procure inputs from upstream suppliers. Subsidizing input production can result in input price decreases that are greater than the effective decrease in marginal costs. That is, overshifting occurs. When the size of the subsidy is not too large, the downstream firm can enjoy an increase in profits greater than the government expenditure on the subsidy. A relatively weak sufficient condition for these results to hold is that suppliers earn a positive profit margin on the marginal unit sold, before taking into account any subsidy payment. Stronger sufficient conditions, tailored to each result, are provided.

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    File URL: http://www.sciencedirect.com/science/article/B6V76-4RP0MGS-1/1/0051a13ad0cd58adcfe0050602f74a3d
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Public Economics.

    Volume (Year): 92 (2008)
    Issue (Month): 7 (July)
    Pages: 1629-1643

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    Handle: RePEc:eee:pubeco:v:92:y:2008:i:7:p:1629-1643

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    Web page: http://www.elsevier.com/locate/inca/505578

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    References

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    1. Sofia Delipalla & Michael Keen, 1991. "The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition," Working Papers 821, Queen's University, Department of Economics.
    2. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
    3. ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B 288, University of Bonn, Germany.
    4. Che, Y.K., 1991. "Design Competition through Multidimensional Auctions," Working papers 9123, Wisconsin Madison - Social Systems.
    5. Jeffrey E. Harris, 1987. "The 1983 Increase in the Federal Cigarette Excise Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 1, pages 87-112 National Bureau of Economic Research, Inc.
    6. S. P. Anderson & A. de Palma & B. Kreider, 1999. "Tax incidence in differentiated product oligopoly," THEMA Working Papers 99-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    7. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February.
    8. Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, vol. 32(2), pages 133-158, March.
    9. Michael L. Katz & Harvey S. Rosen, 1985. "Tax Analysis in an Oligopoly Model," NBER Working Papers 1088, National Bureau of Economic Research, Inc.
    10. Besley, Timothy, 1989. "Commodity taxation and imperfect competition : A note on the effects of entry," Journal of Public Economics, Elsevier, vol. 40(3), pages 359-367, December.
    11. John Asker & Estelle Cantillon, 2006. "Procurement When Price and Quality Matter," Working Papers 06-24, New York University, Leonard N. Stern School of Business, Department of Economics.
    12. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
    13. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 157-78, June Cita.
    14. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers 311, Massachusetts Institute of Technology (MIT), Department of Economics.
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    Cited by:
    1. Martin Peitz & Markus Reisinger, 2009. "Indirect Taxation in Vertical Oligopoly," CESifo Working Paper Series 2583, CESifo Group Munich.

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