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Taxation, Network Externalities, Consumer Suffering, and Profit-Raising Entry: A Cautionary Note

Author

Listed:
  • Qidi Zhang

    (Zhongnan University of Economics and Law)

  • Leonard F. S. Wang

    (Zhongnan University of Economics and Law)

Abstract

Conventional wisdom is that higher competition, implying more active firms, benefits consumers but hurts producer surplus. Under unit taxation/subsidy, we find that the entry of efficient firms improves consumer welfare, while the entry of inefficient firms hurts consumer surplus with network externalities. The entry of efficient firm raises industry profit if the degree of network externalities is relatively high. The latter result is at odds with the conventional wisdom and showed another channel for the possibility of a profit-raising entry. Our results suggest that the strength of network effects should be considered for designing taxation/subsidy and competition policies concurrently.

Suggested Citation

  • Qidi Zhang & Leonard F. S. Wang, 2022. "Taxation, Network Externalities, Consumer Suffering, and Profit-Raising Entry: A Cautionary Note," Journal of Industry, Competition and Trade, Springer, vol. 22(2), pages 225-231, June.
    • Handle: RePEc:kap:jincot:v:22:y:2022:i:2:d:10.1007_s10842-022-00381-z
    DOI: 10.1007/s10842-022-00381-z
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Cournot oligopoly; Network externalities; Entry; Consumer suffering; Profit-raising;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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