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Oligopoly Deregulation and the Taxation of Commodities

Author

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  • Metcalf Gilbert E.

    () (Tufts University)

  • Norman George

    () (Tufts University)

Abstract

We examine market structure and optimal commodity taxation in a world in which firms produce differentiated products and can exert some degree of market power. Building on Kay and Keen (1983), we model two forms of product technologies, two forms of market entry structures, and two forms of pricing. This yields eight models providing a richer analysis of the role of taxes as regulatory tools than could be provided in Kay and Keen's analysis. In the presence of price discrimination, tax policy loses much of its effectiveness at serving as a substitute for direct regulation. Moreover, in cases where taxes can influence market structure, subsides rather than taxes may be required to achieve optimum market structure. Our results should remove the presumption that has developed over the past twenty years that the ad valorem tax rate should be positive to discourage excess entry in imperfectly competitive markets.

Suggested Citation

  • Metcalf Gilbert E. & Norman George, 2003. "Oligopoly Deregulation and the Taxation of Commodities," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-18, October.
  • Handle: RePEc:bpj:bejeap:v:contributions.2:y:2003:i:1:n:12
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    References listed on IDEAS

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    1. Eaton, B Curtis & Schmitt, Nicolas, 1994. "Flexible Manufacturing and Market Structure," American Economic Review, American Economic Association, vol. 84(4), pages 875-888, September.
    2. Norman, George & Thisse, Jacques-Francois, 1999. "Technology Choice and Market Structure: Strategic Aspects of Flexible Manufacturing," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 345-372, September.
    3. Kats, Amoz, 1995. "More on Hotelling's stability in competition," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 89-93, March.
    4. 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.
    5. Norman, George & Thisse, Jacques-Francois, 1996. "Product Variety and Welfare under Tough and Soft Pricing Regimes," Economic Journal, Royal Economic Society, vol. 106(434), pages 76-91, January.
    6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    7. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
    8. 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.
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    Cited by:

    1. Gilbert E. Metcalf & George Norman, 2002. "Oligopoly Deregulation in General Equilibrium: A Tax Neutralization Result," Discussion Papers Series, Department of Economics, Tufts University 0210, Department of Economics, Tufts University.
    2. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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