Unit Vs. Ad Valorem Taxes in Multi-Product Cournot Oligopoly
The welfare dominance of ad valorem taxes over unit taxes in a single-market Cournot oligopoly is well-known. This article extends the analysis to multi-market oligopoly. Provided all ad valorem taxes are positive, unit costs are constant, firms are active in all considered markets, and a representative consumer has convex preferences, it is shown that ad valorem taxes dominate in multi-product equilibrium. We discuss the role of unit cost covariances across multi-product firms in determining the extent of cost efficiencies arising under ad valorem taxation. The issue of merger under oligopoly is also considered. Conditions are identified under which a merger increases the sum of consumer and producer surpluses while also increasing the revenue yield from a set of unit taxes. If not all firms are active in all considered markets, then it is also shown that additional conditions are required to ensure the dominance of ad valorem taxes. In multi-input Cournot oligopsony, however, unit taxation welfare dominates. This is because ad valorem taxes on inputs reduce demand elasticities, amplifying market power distortions.
|Date of creation:||09 Apr 2007|
|Date of revision:|
|Publication status:||Published in Journal of Public Economic Theory, February 2011, vol. 13 no. 1, pp. 125-138|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Blackorby, Charles & Murty, Sushama, 2007.
"Unit versus ad valorem taxes: Monopoly in general equilibrium,"
Journal of Public Economics,
Elsevier, vol. 91(3-4), pages 817-822, April.
- Blackorby, Charles & Murty, Sushama, 2006. "Unit Versus Ad Valorem Taxes : Monopoly In General Equilibrium," The Warwick Economics Research Paper Series (TWERPS) 761, University of Warwick, Department of Economics.
- 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.
- Vincenzo Denicolo & Massimo Matteuzzi, 2000. "Specific and Ad Valorem Taxation in Asymmetric Cournot Oligopolies," International Tax and Public Finance, Springer, vol. 7(3), pages 335-342, May.
- Bergstrom, Theodore C. & Varian, Hal R., 1985. "Two remarks on Cournot equilibria," Economics Letters, Elsevier, vol. 19(1), pages 5-8.
- Greg Shaffer & Stephen W. Salant, 1999. "Unequal Treatment of Identical Agents in Cournot Equilibrium," American Economic Review, American Economic Association, vol. 89(3), pages 585-604, June.
- Milgrom, Paul & Roberts, John, 1996.
"The LeChatelier Principle,"
American Economic Review,
American Economic Association, vol. 86(1), pages 173-79, March.
- Hamilton, Stephen F., 1999. "The comparative efficiency of ad valorem and specific taxes under monopoly and monopsony," Economics Letters, Elsevier, vol. 63(2), pages 235-238, May.
- Lapan, Harvey E. & Hennessy, David A., 2006. "A note on cost arrangement and market performance in a multi-product Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 583-591, May.
- Simon P. Anderson & Andre de Palma & Brent Kreider, 2000.
"The Efficiency of Indirect Taxes under Imperfect Competition,"
Virginia Economics Online Papers
342, University of Virginia, Department of Economics.
- Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "The efficiency of indirect taxes under imperfect competition," Journal of Public Economics, Elsevier, vol. 81(2), pages 231-251, August.
- S. P. Anderson & A. de Palma & B. Kreider, 1999. "The efficiency of indirect taxes under imperfect competition," THEMA Working Papers 99-09, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Anderson, Simon & de Palma, Andre & Kreider, Brent, 2001. "The Efficiency of Indirect Taxes Under Imperfect Competition," Staff General Research Papers 5203, Iowa State University, Department of Economics.
- Anderson, S.P. & de Palma, A. & Kreider, K., 1999. "The Efficiency of Indirect Taxes Under Imperfect Competition," Papers 99-09, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
- Sofia Delipalla & Michael Keen, 1991.
"The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition,"
821, Queen's University, Department of Economics.
- 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.
- Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, vol. 53(1), pages 53-71, January.
- Hennessy, David A. & Lapan, Harvey E., 2005. "Statistical Moments Analysis of Production and Profits in Multi-Product Cournot Oligopoly," Staff General Research Papers 12471, Iowa State University, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:isu:genres:12780. 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: (Curtis Balmer)
If references are entirely missing, you can add them using this form.