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Discretionary Pricing and Tax Shifting

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  • Marvin Frankel

    (University of Illinois, Urbana-Champaign)

Abstract

Utilizing the assumption that the demand function is not objectively known, the paper develops a pricing model of firm. The model, which emphasizes the discretionary nature of the firm's position and provides a formal rationale for it, is then used to examine the reactions of the firm to excise and income taxes. One finding is that the firm's response to a tax may depend in substantial degree on certain factors not ordinarily recognized to be important. A related finding is that these factors may be no less influential for the pricing decision following an income tax as for that following an excise tax. The analysis suggests also that reliance on a pricing formula is an expected byproduct of unknown demand and may serve as effectively as available alternatives to facilitate the price-making process.

Suggested Citation

  • Marvin Frankel, 1978. "Discretionary Pricing and Tax Shifting," Public Finance Review, , vol. 6(1), pages 3-22, January.
    • Handle: RePEc:sae:pubfin:v:6:y:1978:i:1:p:3-22
    DOI: 10.1177/109114217800600101
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    References listed on IDEAS

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    1. Cyert, Richard M & George, Kenneth D, 1969. "Competition, Growth, and Efficiency," Economic Journal, Royal Economic Society, vol. 79(313), pages 23-41, March.
    2. R. L. Hall & C. J. Hitch, 1939. "Price Theory And Business Behaviour," Oxford Economic Papers, Oxford University Press, vol. 0(1), pages 12-45.
    3. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    4. Mieszkowski, Peter, 1969. "Tax Incidence Theory: The Effects of Taxes on the Distribution of Income," Journal of Economic Literature, American Economic Association, vol. 7(4), pages 1103-1124, December.
    5. Baron, David P, 1971. "Demand Uncertainty in Imperfect Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(2), pages 196-208, June.
    6. Marvin Frankel, 1973. "Pricing Decisions Under Unknown Demand," Kyklos, Wiley Blackwell, vol. 26(1), pages 1-24, January.
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