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Negative Tax Incidence with Multiproduct Firms

Author

Listed:
  • Anna D’Annunzio

    (TBS Business School, CSEF (University Federico II) and Toulouse School of Economics)

  • Antonio Russo

    (University of Sheffield and CESifo)

Abstract

A fundamental result in the theory of commodity taxation is that taxes increase consumer prices and reduce supply, aggravating the distortions caused by market power. This result hinges on the assumption that each firm provides a single product. We study the effects of commodity taxes in presence of multiproduct firms that have market power. We consider a monopolist providing two goods and obtain simple conditions such that differentiated ad valorem tax reduce the prices and increases the supply of both goods, thereby increasing total surplus. We show that these conditions can hold in a variety of settings, including add-on pricing, multiproduct retailing with price advertising, intertemporal models with switching costs and two-sided markets. Differentiated unit taxes can induce prices to decrease (as the Edgeworth’s paradox states), but the quantity of the taxed good always decreases.

Suggested Citation

  • Anna D’Annunzio & Antonio Russo, 2023. "Negative Tax Incidence with Multiproduct Firms," Working Papers 2023008, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2023008
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    File URL: https://www.sheffield.ac.uk/economics/research/serps
    File Function: First version, March 21 2023
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    More about this item

    Keywords

    Commodity taxation; tax incidence; multi-product firms;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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