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Commodity Taxation in a Differentiated Oligopoly

  • Cremer, Helmuth
  • Thisse, Jacques-Francois

The authors introduce commodity taxation into a vertical differentiation model with endogenous product selection. They show that a uniform ad valorem tax lowers both qualities, distorts the allocation of consumers between firms, and lowers the consumer prices of both variants. A small uniform tax is always welfare-improving over the no-tax equilibrium. A differentiation of tax rates may or may not be desirable on welfare grounds. If a welfare improvement is possible through a nonuniform tax, it is always the high-quality variant that must be taxed at a higher rate. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 35 (1994)
Issue (Month): 3 (August)
Pages: 613-33

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Handle: RePEc:ier:iecrev:v:35:y:1994:i:3:p:613-33
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