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Welfare effects of taxation in oligopolistic markets

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  • Häckner, Jonas
  • Herzing, Mathias

Abstract

This paper discusses how marginal costs of public funds are related to various market characteristics under imperfect competition. Under a quite general tax scheme, these costs turn out to be lower the wider the firms' product ranges, the lower the degree of market concentration and the lower the degree of product differentiation. Moreover, marginal costs of taxation are lower in Bertrand markets compared to Cournot markets. In cases when marginal costs of public funds cannot easily be assessed we ask if pass-through rates can provide useful information for policy makers. The market characteristics that we analyze are shown to have opposite effects on pass-through and marginal costs of public funds. It is also demonstrated that the marginal cost of public funds is generally lower for ad valorem taxes than for unit taxes. The main results are based on a linear demand system, but a number of extensions confirm that our main results are reasonably robust.

Suggested Citation

  • Häckner, Jonas & Herzing, Mathias, 2016. "Welfare effects of taxation in oligopolistic markets," Journal of Economic Theory, Elsevier, vol. 163(C), pages 141-166.
  • Handle: RePEc:eee:jetheo:v:163:y:2016:i:c:p:141-166
    DOI: 10.1016/j.jet.2016.01.007
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    References listed on IDEAS

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    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
    2. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
    3. Zhao, Jingang, 2001. "A characterization for the negative welfare effects of cost reduction in Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 455-469, March.
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    5. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
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    8. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, May.
    9. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    10. Hackner, Jonas, 2000. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Journal of Economic Theory, Elsevier, vol. 93(2), pages 233-239, August.
    11. Zimmerman, Paul R. & Carlson, Julie A., 2010. "Competition and cost pass-through in differentiated oligopolies," MPRA Paper 25931, University Library of Munich, Germany.
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    13. David Genesove & Wallace P. Mullin, 1998. "Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 355-377, Summer.
    14. Adriaan Kate & Gunnar Niels, 2005. "To What Extent are Cost Savings Passed on to Consumers? An Oligopoly Approach," European Journal of Law and Economics, Springer, vol. 20(3), pages 323-337, November.
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    Cited by:

    1. repec:eee:resene:v:48:y:2017:i:c:p:83-97 is not listed on IDEAS
    2. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    3. Alexandrov, Alexei & Bedre-Defolie, Özlem, 2017. "LeChatelier–Samuelson principle in games and pass-through of shocks," Journal of Economic Theory, Elsevier, vol. 168(C), pages 44-54.
    4. Takanori Adachi & Muhammad Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    5. repec:kap:jincot:v:17:y:2017:i:4:d:10.1007_s10842-017-0244-5 is not listed on IDEAS
    6. repec:kap:jeczfn:v:122:y:2017:i:2:d:10.1007_s00712-017-0538-4 is not listed on IDEAS

    More about this item

    Keywords

    Welfare; Taxation; Imperfect competition;

    JEL classification:

    • 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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