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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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    References listed on IDEAS

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    Cited by:

    1. Youssef Benzarti & Dorian Carloni & Jarkko Harju & Tuomas Kosonen, 2017. "What Goes Up May Not Come Down: Asymmetric Incidence of Value-Added Taxes," NBER Working Papers 23849, National Bureau of Economic Research, Inc.
    2. Rauhanen, Timo & Harju, Jarkko & Matikka, Tuomas, 2016. "The effects of size-based regulation on small firms: evidence from VAT threshold," Working Papers 75, VATT Institute for Economic Research.
    3. Youssef Benzarti & Dorian Carloni, 2017. "Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France," NBER Working Papers 23848, National Bureau of Economic Research, Inc.
    4. Agustin Redonda, 2016. "Tax Expenditures and Sustainability. An Overview," Discussion Notes 1603, Council on Economic Policies.

    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;

    JEL classification:

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

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