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Effects of an ad valorem Web Tax in a Cournot-Nash market for digital advertising

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Abstract

We extend the theory of tax incidence under Cournot-Nash oligopolistic competition to study the effects of an ad valorem sales tax on Web services (so-called Web Tax) that are provided free of charge to users, and produce advertising space sold to businesses. Ads are more valuable to advertisers the more users are served by a Web service. Users have ads-neutral preferences and Web companies compete in a Cournot-Nash fashion on the advertising market but enjoy monopolistic power in the service market they serve. We demonstrate that, contrary to standard theoretical results, the equilibrium market price might be reduced by a Web Tax. The conditions for such a decrease depend upon the elasticity of ads demand.

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  • Diego d'Andria, 2018. "Effects of an ad valorem Web Tax in a Cournot-Nash market for digital advertising," JRC Working Papers on Taxation & Structural Reforms 2018-09, Joint Research Centre.
    • Handle: RePEc:ipt:taxref:201809
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    More about this item

    Keywords

    Web tax; digital advertising; Cournot competition; tax incidence…;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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