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Estimating the Effects of Tax Reform in Differentiated Product Oligopolistic Markets

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  • Fershtman, Chaim
  • Gandal, Neil
  • Markovich, Sarit

Abstract

The incidence of taxation and the design of an optimal tax system have been extensively discussed in the public finance literature but mainly within a competitive market setting or within a homogenous good (Cournot type) oligopoly. In a differentiated product oligopoly, the effect of taxation can be more complex as the rate of taxation may affect not only the prices, but also the profile and quality of products that are sold in the market. In this paper, we examine the effects of changing tax regimes in a differentiated product oligopoly. In order to illustrate our approach, we employ data from one such market: the automobile market in Israel. The analysis involves two steps. We first estimate the Nash equilibrium in a differentiated product oligopoly and then use the results to simulate the new equilibrium under different tax regimes. Using the estimated parameters from the current market equilibrium, we examine the effect of changes in tax policy on tax incidence, market prices, sales (and the types of cars sold in the market), consumer surplus, firms' profits, as well as government revenues.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2107.

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Date of creation: Mar 1999
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Handle: RePEc:cpr:ceprdp:2107

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Keywords: differentiated product oligopoly; Taxation;

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References

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  1. Michael L. Katz & Harvey S. Rosen, 1983. "Tax Analysis in an Oligopoly Model," NBER Working Papers 1088, National Bureau of Economic Research, Inc.
  2. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 841-90, July.
  3. CREMER, Helmut & THISSE, Jacques-François, 1992. "Commodity taxation in a differentiated oligopoly," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1992035, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Myles, G. D., 1987. "Tax design in the presence of imperfect competition : An example," Journal of Public Economics, Elsevier, vol. 34(3), pages 367-378, December.
  5. Alan J. Auerbach, 1982. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  6. Barnett, Paul G. & Keeler, Theodore E. & Hu, Teh-wei, 1995. "Oligopoly structure and the incidence of cigarette excise taxes," Journal of Public Economics, Elsevier, vol. 57(3), pages 457-470, July.
  7. Kenkel, Donald S, 1996. "New Estimates of the Optimal Tax on Alcohol," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 34(2), pages 296-319, April.
  8. Gruenspecht, Howard K., 1988. "Export subsidies for differentiated products," Journal of International Economics, Elsevier, vol. 24(3-4), pages 331-344, May.
  9. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 891-951, July.
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Cited by:
  1. Moraga-Gonzalez, Jose Luis & Viaene, Jean-Marie, 2005. "Trade policy and quality leadership in transition economies," European Economic Review, Elsevier, vol. 49(2), pages 359-385, February.
  2. Devereux, Michael P. & Lanot, Gauthier, 2003. "Measuring tax incidence: an application to mortgage provision in the UK," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1747-1778, August.
  3. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2009. "Coverage of Retail Stores and Discrete Choice Models of Demand: Estimating Price Elasticities and Welfare Effects," Working Papers, Geary Institute, University College Dublin 200922, Geary Institute, University College Dublin.
  4. José Luis Moraga Gonzales & Jean-Marie Viaene, 2001. "Procompetitive Trade Policies," CESifo Working Paper Series 597, CESifo Group Munich.
  5. S Lutz, 2005. "Can a Tariff on Foreign Competition Harm the Domestic Industry?," The School of Economics Discussion Paper Series, Economics, The University of Manchester 0510, Economics, The University of Manchester.
  6. Kim, Donghun, 2004. "Market Structure, Price Pass-Through and Welfare with Differentiated Products," Research Reports, University of Connecticut, Food Marketing Policy Center 25157, University of Connecticut, Food Marketing Policy Center.
  7. Adamos Adamou & Sofronis Clerides & Theodoros Zachariadis, 2012. "Assessment of CO2-Oriented Vehicle Tax Reforms: A Case Study of Greece," University of Cyprus Working Papers in Economics, University of Cyprus Department of Economics 04-2012, University of Cyprus Department of Economics.
  8. Adamos Adamou & Sofronis Clerides & Theodoros Zachariadis, 2012. "Trade-offs in CO2-Oriented Vehicle Tax Reforms: A Case Study of Greece," Working Paper Series, The Rimini Centre for Economic Analysis 33_12, The Rimini Centre for Economic Analysis.
  9. Dong Choi & Jongeun Oh & Yeonbae Kim & Junseok Hwang, 2012. "Competition in the Korean Internet Portal Market: Network Effects, Profit, and Market Efficiency," Review of Industrial Organization, Springer, Springer, vol. 40(1), pages 51-73, February.
  10. Mabit, Stefan L., 2014. "Vehicle type choice under the influence of a tax reform and rising fuel prices," Transportation Research Part A: Policy and Practice, Elsevier, vol. 64(C), pages 32-42.
  11. José Luis Moraga Gonzales & Jean-Marie Viaene, 2001. "Trade and Industrial Policy of Transition Economies," CESifo Working Paper Series 446, CESifo Group Munich.
  12. Mackay, Daniel, 2011. "Estimating the impact of investment tax credits on aircraft demand," MPRA Paper 32767, University Library of Munich, Germany.
  13. Ronald W.Cotterill & Donghun Kim, 2006. "Market Structure, Cost Pass-Through and Welfare with Differentiated Products," Working Papers, Research Institute, International University of Japan EMS_2006_05, Research Institute, International University of Japan.

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