Estimating the Effects of Tax Reform in Differentiated Product Oligopolistic Markets
AbstractThe 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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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2107.
Date of creation: Mar 1999
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Other versions of this item:
- Fershtman, C. & Gandal, N. & Markovich, S., 1997. "Estimating the Effect of Tax Reform in Differentiated Product Oligopolistic Markets," Papers 29-97, Tel Aviv.
- Fershtman, C. & Gandal, N. & Markovich, S., 1998. "Estimating the Effect of Tax Reform in Differentiated Product Oligopolistic Markets," Discussion Paper 1998-34, Tilburg University, Center for Economic Research.
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- L8 - Industrial Organization - - Industry Studies: Services
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