IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/1992035.html
   My bibliography  Save this paper

Commodity taxation in a differentiated oligopoly

Author

Listed:
  • CREMER, Helmut

    (Virginia Polytechnic Institute and state University)

  • THISSE, Jacques-François

    () (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

Abstract

We introduce commodity taxation into a duopoly model of vertical product differentiation. Our setting differs from the existing Iiterature in two respects. First, we consider price competition and, second, we allow for endogenous product selection. As usual, firms choose the quality of their products prior to making their pricing decisions. We first show that a uniform ad valorem tax, where the same rate applies to all variants of the product, lowers both equilibrium qualities and distorts the allocation of consumers between firms. More interestingly, we then establish that a number of familiar properties are no longer valid in our setting. In particular, it appears that the tax lowers the consumer prices of both variants and that the decrease in consumer prices is larger than the decrease in production costs brought about by the reduction in qualities. Even more surprisingly, it turns out that a small uniform ad valorem tax whose proceed are redistributed in a lump-sum way is always welfare-improving over the no-tax equilibrium. Finally, we allow for the possibility of a non-uniform tax with different rates applying to different variants of the commodity. It turns out that depending on the parameter values such a differentiation of tax rates mayor may not be desirable on welfare grounds. If a welfare improvement is possible through a non-uniform tax, it is always the high-quality variant which must be taxed at a higher rate.

Suggested Citation

  • CREMER, Helmut & THISSE, Jacques-François, 1992. "Commodity taxation in a differentiated oligopoly," CORE Discussion Papers 1992035, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1992035
    as

    Download full text from publisher

    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-1992.html
    Download Restriction: no

    Other versions of this item:

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cor:louvco:1992035. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS). General contact details of provider: http://edirc.repec.org/data/coreebe.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.