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Indirect Taxation in Vertical Oligopoly

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Author Info
Martin Peitz
Markus Reisinger () (Department of Economics, University of Mannheim, 68131 Mannheim, Germany, Department of Economics, University of Munich, Kaulbachstr. 45, 80539 Munich, Germany)

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Abstract

This paper analyzes the effects of specific and ad valorem taxation in an industry with downstream and upstream oligopoly. We find that in the short run, i.e. when the number of firms in both markets is exogenous, the results concerning tax incidence tend to be qualitatively similar to models where the upstream market is perfectly competitive. However, both over- and undershifting are more pronounced, potentially to a very large extent. Instead, in the long run under endogenous entry and exit overshifting of both taxes is more likely to occur and is more pronounced under upstream oligopoly. As a result of this, a tax increase is more likely to be welfare reducing. We also demonstrate that downstream and upstream taxation are equivalent in the short run while this is not true for the ad valorem tax in the long run. We show that it is normally more efficient to tax downstream.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 255.

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Date of creation: Feb 2009
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Handle: RePEc:trf:wpaper:255

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Related research
Keywords: Specific Tax; Ad Valorem Tax; Value-Added Tax; Tax Incidence; Tax Efficiency; Indirect Taxation; Imperfect Competition; Vertical Oligopoly.;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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  1. Anderson, Simon & de Palma, Andre & Kreider, Brent, 2002. "Tax Incidence in Differentiated Product Oligopoly," Staff General Research Papers 5202, Iowa State University, Department of Economics.
    Other versions:
  2. Hamilton, Stephen F., 1999. "The comparative efficiency of ad valorem and specific taxes under monopoly and monopsony," Economics Letters, Elsevier, vol. 63(2), pages 235-238, May. [Downloadable!] (restricted)
  3. Karp, Larry S & Perloff, Jeffrey M, 1989. "Estimating Market Structure and Tax Incidence: The Japanese Television Market," Journal of Industrial Economics, Blackwell Publishing, vol. 37(3), pages 225-39, March. [Downloadable!] (restricted)
    Other versions:
  4. Suzumura, Kotaro & Kiyono, Kazuharu, 1987. "Entry Barriers and Economic Welfare," Review of Economic Studies, Blackwell Publishing, vol. 54(1), pages 157-67, January. [Downloadable!] (restricted)
  5. Anderson, Simon & de Palma, Andre & Kreider, Brent, 2002. "The Efficiency of Indirect Taxes under Imperfect Competition," Staff General Research Papers 5203, Iowa State University, Department of Economics.
    Other versions:
  6. Stephen F. Hamilton, 2009. "Excise Taxes with Multiproduct Transactions," American Economic Review, American Economic Association, vol. 99(1), pages 458-71, March. [Downloadable!]
  7. Greenhut, M L & Ohta, H, 1979. "Vertical Integration of Successive Oligopolists," American Economic Review, American Economic Association, vol. 69(1), pages 137-41, March.
  8. Asker, John, 2008. "Subsidizing (and taxing) business procurement," Journal of Public Economics, Elsevier, vol. 92(7), pages 1629-1643, July. [Downloadable!] (restricted)
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  11. Konishi, Hideki, 1990. "Final and intermediate goods taxation in an oligopolistic economy with free entry," Journal of Public Economics, Elsevier, vol. 42(3), pages 371-386, August. [Downloadable!] (restricted)
  12. Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, vol. 32(2), pages 133-158, March. [Downloadable!] (restricted)
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  14. Hamilton, Stephen F., 1999. "Tax incidence under oligopoly: a comparison of policy approaches," Journal of Public Economics, Elsevier, vol. 71(2), pages 233-245, February. [Downloadable!] (restricted)
  15. Delipalla, Sophia & O'Donnell, Owen, 2001. "Estimating tax incidence, market power and market conduct: The European cigarette industry," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 885-908, May. [Downloadable!] (restricted)
  16. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May. [Downloadable!] (restricted)
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