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Consumption taxes in monopolistic competition: a comment

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  • Henrik Vetter

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Abstract

We show that an ad valorem tax is better than an equal-revenue unit tax when consumers spend some fixed proportion of income on taxed goods, when firms use constant mark-up pricing, and entry and exit drive per-firm profit to zero. These key assumptions implies that ad valorem taxes are superior in oligopoly as well as monopolistic competition, showing that earlier results on taxes in monopolistic competition (Schröder in J Econ 83(3):281–292, 2004 ) are not due to the mode of competition, but rather are due to the functional forms used. Copyright Springer-Verlag Wien 2013

Suggested Citation

  • Henrik Vetter, 2013. "Consumption taxes in monopolistic competition: a comment," Journal of Economics, Springer, vol. 110(3), pages 287-295, November.
  • Handle: RePEc:kap:jeczfn:v:110:y:2013:i:3:p:287-295
    DOI: 10.1007/s00712-012-0320-6
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    File URL: http://hdl.handle.net/10.1007/s00712-012-0320-6
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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. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    4. Leslie Reinhorn, 2012. "Optimal taxation with monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(2), pages 216-236, April.
    5. Philipp J. H. Schröder, 2004. "The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition," Journal of Economics, Springer, vol. 83(3), pages 281-292, December.
    6. Susanne Dröge & Philipp Schröder, 2009. "The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(2), pages 164-175, April.
    7. Stephen F. Hamilton, 2009. "Excise Taxes with Multiproduct Transactions," American Economic Review, American Economic Association, vol. 99(1), pages 458-471, March.
    8. D. B. Suits & R. A. Musgrave, 1953. "Ad Valorem and Unit Taxes Compared," The Quarterly Journal of Economics, Oxford University Press, vol. 67(4), pages 598-604.
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    Cited by:

    1. Bognetti, Giuseppe & Santoni, Michele, 2016. "Increasing the substitution elasticity can improve VAT compliance and social welfare," Economic Modelling, Elsevier, vol. 58(C), pages 293-307.
    2. Hiroshi Aiura & Hikaru Ogawa, 2016. "Indirect Taxes in the Cross-border Shopping Model: A Monopolistic Competition Approach," CIRJE F-Series CIRJE-F-1014, CIRJE, Faculty of Economics, University of Tokyo.

    More about this item

    Keywords

    Unit taxes; Ad valorem taxes; Monopolistic competition; Mark-up pricing; H22; D43;

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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