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Firm types, price-setting strategies, and consumption-tax incidence

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  • Kosonen, Tuomas
  • Harju, Jarkko
  • Nordström Skans, Oskar

Abstract

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 pass-through. 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.

Suggested Citation

  • Kosonen, Tuomas & Harju, Jarkko & Nordström Skans, Oskar, 2015. "Firm types, price-setting strategies, and consumption-tax incidence," Working Papers 70, VATT Institute for Economic Research.
  • Handle: RePEc:fer:wpaper:70
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    Cited by:

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    2. Clemens Fuest & Florian Neumeier & Daniel Stöhlker, 2020. "The Pass-Through of Temporary VAT Rate Cuts in German Supermarket Retail," ifo Working Paper Series 341, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    3. Benzarti, Youssef & Harju, Jarkko, 2021. "Can payroll tax cuts help firms during recessions?," Journal of Public Economics, Elsevier, vol. 200(C).
    4. Emmanuel Chavez & Cristobal Dominguez, 2021. "Who pays for a Value Added Tax Hike at an International Border? Evidence from Mexico," Working Papers halshs-03364026, HAL.
    5. Miguel Almunia & Jarkko Harju & Kaisa Kotakorpi & Janne Tukiainen & Jouko Verho, 2019. "Expanding access to administrative data: the case of tax authorities in Finland and the UK," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(3), pages 661-676, June.
    6. Harju, Jarkko & Matikka, Tuomas & Rauhanen, Timo, 2019. "Compliance costs vs. tax incentives: Why do entrepreneurs respond to size-based regulations?," Journal of Public Economics, Elsevier, vol. 173(C), pages 139-164.
    7. Youssef Benzarti & Dorian Carloni & Jarkko Harju & Tuomas Kosonen, 2020. "What Goes Up May Not Come Down: Asymmetric Incidence of Value-Added Taxes," Journal of Political Economy, University of Chicago Press, vol. 128(12), pages 4438-4474.
    8. Youssef Benzarti & Dorian Carloni, 2019. "Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France," American Economic Journal: Economic Policy, American Economic Association, vol. 11(1), pages 38-63, February.
    9. Egebark, Johan & Kaunitz, Niklas, 2018. "Payroll taxes and youth labor demand," Labour Economics, Elsevier, vol. 55(C), pages 163-177.
    10. Jarkko Harju & Tuomas Matikka & Timo Rauhanen, 2016. "The Effects of Size-Based Regulation on Small Firms: Evidence from VAT Threshold," CESifo Working Paper Series 6115, CESifo.
    11. Mariia A. Elkina, 2019. "The Impact of Indirect Tax Rates Cut on Inflation: Evidence From Russia," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 127006, Russia, issue 5, pages 37-49, October.
    12. Clemens Fuest & Florian Neumeier & Daniel Stöhlker, 2021. "The Pass-Through of Temporary VAT Rate Cuts: Evidence from German Supermarket Retail," CESifo Working Paper Series 9149, CESifo.
    13. Forslund, Anders, 2019. "Employment outcomes and policies in Sweden during recent decades," Working Paper Series 2019:15, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    14. Agustin Redonda, 2016. "Tax Expenditures and Sustainability. An Overview," Discussion Notes 1603, Council on Economic Policies.

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    More about this item

    Keywords

    firm types; VAT incidence; price setting; restaurants; Taxation; Verotus; Taxation and Social Transfers; Julkisen talouden rahoitus ja tulonsiirrot; E310 - Price Level; Inflation; Deflation; H220 - Taxation and Subsidies: Incidence; H320 - Fiscal Policies and Behavior of Economic Agents: Firm;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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