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Tax Incidence in Differentiated Product Oligopoly

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  • Simon P. Anderson

    ()

  • Andre de Palma

    ()

  • Brent Kreider

    ()

Abstract

We analyze the incidence of ad valorem and unit excise taxes in an oligopolistic industry with differentiated products and price-setting (Bertrand) firms. Both taxes may be passed on to consumers by more than 100 percent, and an increase in the tax rate can increase short run firm profits (and hence the long run number of firms). We provide summary conditions for these effects to arise. The conditions depend on demand curvatures and are written in elasticity form. Surprisingly, the analysis largely corroborates Cournot results with homogeneous demand.

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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap341.pdf
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Bibliographic Info

Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 341.

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Length: 23 pages
Date of creation: Feb 2000
Date of revision:
Handle: RePEc:vir:virpap:341

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Web page: http://www.virginia.edu/economics/home.html

Related research

Keywords: Excise tax; unit tax; specific tax; ad valorem tax; imperfect competition; product differentiation; Bertrand; oligopoly; tax incidence; discrete choice models;

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References

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  1. Anderson, Simon & de Palma, Andre & Kreider, Brent, 2001. "The Efficiency of Indirect Taxes Under Imperfect Competition," Staff General Research Papers, Iowa State University, Department of Economics 5203, Iowa State University, Department of Economics.
  2. Sofia Delipalla & Michael Keen, 1991. "The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition," Working Papers, Queen's University, Department of Economics 821, Queen's University, Department of Economics.
  3. S. P. Anderson & A. de Palma & B. Kreider, 1999. "Tax incidence in differentiated product oligopoly," THEMA Working Papers, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise 99-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  4. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association, National Tax Association, vol. 52(n. 2), pages 157-78, June.
  5. Anderson, Simon P & Neven, Damien J, 1991. "Cournot Competition Yields Spatial Agglomeration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 793-808, November.
  6. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February.
  7. Hamilton, Stephen F., 1999. "Tax incidence under oligopoly: a comparison of policy approaches," Journal of Public Economics, Elsevier, Elsevier, vol. 71(2), pages 233-245, February.
  8. Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, Elsevier, vol. 32(2), pages 133-158, March.
  9. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
  10. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  11. 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, Elsevier, vol. 23(3), pages 339-358, September.
  12. Besley, Timothy, 1989. "Commodity taxation and imperfect competition : A note on the effects of entry," Journal of Public Economics, Elsevier, Elsevier, vol. 40(3), pages 359-367, December.
  13. Simon P. Anderson & Andre de Palma, 1998. "From Local to Global Competition," Virginia Economics Online Papers, University of Virginia, Department of Economics 344, University of Virginia, Department of Economics.
  14. Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, Elsevier, vol. 53(1), pages 53-71, January.
  15. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 891-951, July.
  16. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October.
  17. Sophia Delipalla & Owen O'Donnell, 1998. "The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition: Evidence from the European Cigarette Industry," Studies in Economics, Department of Economics, University of Kent 9802, Department of Economics, University of Kent.
  18. Poterba, James M., 1996. "Retail Price Reactions to Changes in State and Local Sales Taxes," National Tax Journal, National Tax Association, National Tax Association, vol. 49(2), pages 165-76, June.
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