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Firm Types, Price-Setting Strategies, and Consumption-Tax Incidence

Listed author(s):
  • Jarkko Harju
  • Tuomas Kosonen
  • Oskar Nordström Skans

Studying very detailed micro data collected around two different VAT reforms in Europe, we show that tax incidence is heavily dependent on the characteristics of the price-setting firms. The reforms generated bimodal price-change distributions; nearly all independent restaurants left prices unchanged whereas a substantial fraction of restaurants belonging to chains chose a complete passthrough. These differences cannot be explained by location, initial prices or other market-segment indicators. Instead, differences appear to arise because independent restaurants aim for (very) crude price ranges rather than fine-tuned optimized prices, whereas chains use more elaborate, coordinated pricing strategies.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2015/wp-cesifo-2015-12/cesifo1_wp5654.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 5654.

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Date of creation: 2015
Handle: RePEc:ces:ceswps:_5654
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