Vertical Market Structure and Tax Pass-through: Evidence from the Spanish Gasoline Market

Many papers have explored the relationship between the horizontal market structure and consumers' tax incidence. However, the extent to which the vertical market structure affects tax incidence is an unexplored question. In this study we examine whether —and to what extent— the vertical market structure explains differences in the pass-through of a tax change onto consumers. First, we characterize the optimal pricing rule for a price-setting retailer; we embed this optimal pricing problem in the classical “successive monopolies†framework. Then, using a unique confidential dataset on gas stations' vertical contracts, in combination with prices at the pump and gas stations' characteristics in Spain, we show that —consistent with the theoretical predictions— the pass-through of the gas tax is higher in vertically-integrated gas stations than in non-vertically integrated one.