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Taxation and the Sustainability of Collusion: Ad Valorem versus Specific Taxes

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Abstract

Assuming constant marginal cost, it is shown that a switch from specific to ad valorem taxation has no effect on the critical discount factor required to sustain collusion. This result is shown to hold for Cournot oligopoly as well as for Bertrand oligopoly when collusion is sustained with Nash-reversion strategies or optimal-punishment strategies. In a Cournot duopoly model with linear demand and quadratic costs, it is shown that the critical discount factor is lower with an ad valorem tax than with a specific tax. However, in contrast to Colombo and Labrecciosa (2013), it is shown that revenue is always higher with an ad valorem tax than with a specific tax.

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  • Azacis, Helmuts & Collie, David R., 2014. "Taxation and the Sustainability of Collusion: Ad Valorem versus Specific Taxes," Cardiff Economics Working Papers E2014/15, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2014/15
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    Cited by:

    1. Stamatopoulos, Giorgos, 2019. "A strategic tax mechanism," MPRA Paper 93602, University Library of Munich, Germany.
    2. Qidi Zhang & Leonard F.S. Wang & Yapo Yang, 2020. "Indirect taxation with shadow cost of public funds in mixed oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(3), pages 415-425, April.
    3. Douglas C. Turner, 2022. "Taxation and the sustainability of collusion with asymmetric costs," Journal of Economics, Springer, vol. 135(1), pages 1-48, January.
    4. Ya‐Po Yang & Qidi Zhang & Leonard F. S. Wang, 2022. "Tariff simplification, privatization, and welfare superiority," Metroeconomica, Wiley Blackwell, vol. 73(2), pages 683-707, May.
    5. Helmuts Azacis & David R Collie, 2018. "Taxation and the sustainability of collusion: ad valorem versus specific taxes," Journal of Economics, Springer, vol. 125(2), pages 173-188, October.
    6. Honglin Li & Xiaolu Liu, 2021. "Ad valorem versus per unit taxation: a perspective from price signaling," Journal of Economics, Springer, vol. 134(1), pages 27-47, September.
    7. Kuang-Cheng Andy Wang & Ping-Yao Chou & Wen-Jung Liang, 2022. "Commodity taxes and rent extraction," Journal of Economics, Springer, vol. 135(3), pages 285-297, April.
    8. Todorova, Tamara & Vatoci, Besar, 2020. "Taxation and strategic reaction: A comparison of Cournot, Stackelberg and collusion," MPRA Paper 106487, University Library of Munich, Germany.

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    More about this item

    Keywords

    Taxes; Imperfect Competition; Oligopoly; Cartel; Supergame;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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