Jeux sans frontières Revisited : A New Study of Tax Competition when Transportation Cost is Composite

The purpose of this paper is to investigate the effects of variable population densities, composite transportation costs, and consumer preferences on tax competition. A simple for mula for the number of cross border shoppers is derived which yields explicit expressions for com posite reaction functions. The Nash equilibrium problem may have zero or several solutions. The major contribution of this paper is that by considering more realistic forms of the three variables, pop ulation densities, composite transportation costs, and consumer preferences, one can obtain major structural changes in the Nash Equilibrium (NE) outcome. 1) The existence of a unique NE is no longer guaranteed, 2) the size of the region is no longer significant in revenue maximization schemes, 3) the amount of cross border shopping is dependent on all three variables, 4) evolution in any or all three variables, can be PARETO-improving if, the evolution of either of these variables is correlated with the evolution of the others, 5) tax coordination is advantageous irrespective of the size of each region. The implication of these findings is that the best strategy is tax harmonization.