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Oligopoly Deregulation in General Equilibrium: A Tax Neutralization Result

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  • Gilbert E. Metcalf
  • George Norman

Abstract

We examine the interplay between market structure and the form that commodity taxation should take in a general equilibrium model in which firms produce differentiated products and so are able to exert market power. Our analysis takes account of two important recent developments that affect market structure and so the appropriate design and effectiveness of commodity taxation: market deregulation and technological change. When market deregulation facilitates price discrimination, we find that tax policy is ineffective as a means to influence market structure. We further show that when tax rates are set optimally government is able to neutralize the potentially detrimental welfare impact of restrictive entry conditions in the differentiated product sector. Finally, we present conditions under which price discrimination is welfare improving.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9416.

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Date of creation: Jan 2003
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Handle: RePEc:nbr:nberwo:9416

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  1. Kats, Amoz, 1995. "More on Hotelling's stability in competition," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 89-93, March.
  2. Kay, J. A. & Keen, M. J., 1983. "How should commodities be taxed? : Market structure, product heterogeneity and the optimal structure of commodity taxes," European Economic Review, Elsevier, vol. 23(3), pages 339-358, September.
  3. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  4. Cremer, Helmuth & Thisse, Jacques-Francois, 1994. "Commodity Taxation in a Differentiated Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 613-33, August.
  5. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  6. NORMAN, George & THISSE, Jacques-François, . "Technology choice and market structure: strategic aspects of flexible manufacturing," CORE Discussion Papers RP -1414, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Curtis Eaton, B. & Schmitt, N., 1991. "Flexible Manufacturing and Market Structure," Papers 1991-02, Tasmania - Department of Economics.
  8. Thisse, J.-F. & Vives, X., 1987. "On the strategic choice of spatial price policy," CORE Discussion Papers 1987008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Norman, G. & Thisse, J.-F., . "Product variety and welfare under tough and soft pricing regimes," CORE Discussion Papers RP -1201, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Armstrong, M. & Vickers, J., 1992. "Price Discrimination, Competition and Regulation," Economics Series Working Papers 99140, University of Oxford, Department of Economics.
  11. d ASPREMONT , Claude & MOTTA , Massimo, 1994. "Tougher Price-Competition or Lower Concentration : A Trade-Off for Antitrust Authorities ?," CORE Discussion Papers 1994015, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Gilbert E. Metcalf & George Norman, 2003. "Oligopoly Deregulation and the Taxation of Commodities," NBER Working Papers 9415, National Bureau of Economic Research, Inc.
  13. B. Curtis Eaton & Myrna Holtz Wooders, 1985. "Sophisticated Entry in a Model of Spatial Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 282-297, Summer.
  14. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
  15. Norman,George & Thisse,Jacques-François (ed.), 2000. "Market Structure and Competition Policy," Cambridge Books, Cambridge University Press, number 9780521783330, April.
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Cited by:
  1. Darlene C. Chisholm & George Norman, 2002. "Spatial Competition and Demand: An Application to Motion Pictures," Discussion Papers Series, Department of Economics, Tufts University 0216, Department of Economics, Tufts University.

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