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Heterogeneous Tax-Cut Pass-Through and Market Structure

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  • Yenjae Chang

    (Korea Energy Economics Institute)

Abstract

This paper estimates the effects of a motor fuel tax cut on retail prices and examines the role of market competition intensity in determining the pass-through rate. By employing a matched difference-in-differences strategy that uses nationwide panel data at the gas station level, I investigate how the magnitude of price reduction in response to the temporary tax reform in South Korea varies across local market structures. The results indicate a positive association between pass-through rates and the intensity of competition, with incomplete pass-through observed predominantly among firms that face fewer rivals. These findings offer an explanation for the incomplete tax-cut effects that are observed in energy and other consumption taxes and suggest that tax-reduction programs can benefit firms with local market power by increasing their profits, which thereby decreases the efficacy of fiscal policies that are aimed at reducing prices.

Suggested Citation

  • Yenjae Chang, 2025. "Heterogeneous Tax-Cut Pass-Through and Market Structure," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 66(2), pages 233-259, February.
    • Handle: RePEc:kap:revind:v:66:y:2025:i:2:d:10.1007_s11151-024-09986-6
    DOI: 10.1007/s11151-024-09986-6
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    More about this item

    Keywords

    Energy taxes; Tax-cuts; Cost pass-through; Market structure; Motor fuel taxes; Retail gasoline market;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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