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Indirect taxation and undesirable competition

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  • Wang, Leonard F.S.
  • Zeng, Chenhang
  • Zhang, Qidi

Abstract

This paper studies undesirable competition in an asymmetric oligopoly under ad valorem taxation. We show that when the cost advantage of efficient firms is large, both the entry of and the cost reduction in efficient firms raise social welfare, but unexpectedly hurt consumers. Moreover, we find that unit taxation yields higher consumer surplus in equilibrium, and it could also be welfare superior to ad valorem taxation under certain conditions.

Suggested Citation

  • Wang, Leonard F.S. & Zeng, Chenhang & Zhang, Qidi, 2019. "Indirect taxation and undesirable competition," Economics Letters, Elsevier, vol. 181(C), pages 104-106.
    • Handle: RePEc:eee:ecolet:v:181:y:2019:i:c:p:104-106
    DOI: 10.1016/j.econlet.2019.05.010
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    References listed on IDEAS

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    1. Soumyananda Dinda & Arijit Mukherjee, 2014. "A Note on the Adverse Effect of Competition on Consumers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(1), pages 157-163, February.
    2. 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.
    3. Zhao, Jingang, 2001. "A characterization for the negative welfare effects of cost reduction in Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 455-469, March.
    4. Kuang-Cheng Andy Wang & Ping-Yao Chou & Wen-Jung Liang, 2018. "Specific versus ad valorem taxes in the presence of cost and quality differences," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1197-1214, October.
    5. Harvey E. Lapan & David A. Hennessy, 2011. "Unit versus Ad Valorem Taxes in Multiproduct Cournot Oligopoly," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(1), pages 125-138, February.
    6. Arijit Mukherjee & Laixun Zhao, 2017. "Profit Raising Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 65(1), pages 214-219, March.
    7. X. Wang & Jingang Zhao, 2009. "On the efficiency of indirect taxes in differentiated oligopolies with asymmetric costs," Journal of Economics, Springer, vol. 96(3), pages 223-239, April.
    8. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
    9. Arijit Mukherjee & Udo Broll & Soma Mukherjee, 2009. "The welfare effects of entry: the role of the input market," Journal of Economics, Springer, vol. 98(3), pages 189-201, December.
    10. Vincenzo Denicolo & Massimo Matteuzzi, 2000. "Specific and Ad Valorem Taxation in Asymmetric Cournot Oligopolies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(3), pages 335-342, May.
    11. Klemperer, Paul D, 1988. "Welfare Effects of Entry into Markets with Switching Costs," Journal of Industrial Economics, Wiley Blackwell, vol. 37(2), pages 159-165, December.
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    Citations

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    Cited by:

    1. Jiaxin Han & Chenhang Zeng, 2023. "The effects of downstream entry in a vertical mixed oligopoly: the role of input pricing," Journal of Economics, Springer, vol. 140(1), pages 37-61, September.
    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. Pak-Sing Choi & Felix Munoz-Garcia, 2023. "Can more perishable products be welfare-improving?," Economics Bulletin, AccessEcon, vol. 43(2), pages 1088-1097.
    4. Qidi Zhang & Leonard F. S. Wang, 2022. "Taxation, Network Externalities, Consumer Suffering, and Profit-Raising Entry: A Cautionary Note," Journal of Industry, Competition and Trade, Springer, vol. 22(2), pages 225-231, June.
    5. Wang, Leonard F.S. & Zeng, Chenhang & Zhang, Qidi, 2019. "Indirect taxation and consumer welfare in an asymmetric Stackelberg oligopoly," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Ad valorem tax; Unit tax; Cournot;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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