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Market structure, the functional form of demand and the sensitivity of the vertical reaction function

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  • Agustin Redonda

    (Council on Economic Policies (CEP))

Abstract

Tax incidence and tax competition have largely been studied separately. Models assessing the incidence of excise taxes do not consider strategic interaction and exclusively assess the pass-through of taxes to prices. These settings focus on imperfectly competitive markets where prices can react more (less) than proportionally to a variation in tax rates. On the other hand, tax competition models focus on the strategic interactions arising because of a shared tax base but assume producer prices to be constant. Hence, the pass-through of taxes is restricted to be fully on consumers. This paper extends Keen (1997) by relaxing this assumption and, thus, by allowing local governments to internalize the possibility that taxes are over-shifted (undershifted). Interestingly, market structure (that was absent in previous settings), turns out to be one of the determinants of the vertical reaction function in this model; particularly determining the sensitivity of local tax setters to a variation of higher-tier taxes.

Suggested Citation

  • Agustin Redonda, 2015. "Market structure, the functional form of demand and the sensitivity of the vertical reaction function," Working Papers 2015/28, Institut d'Economia de Barcelona (IEB).
    • Handle: RePEc:ieb:wpaper:doc2015-28
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    More about this item

    Keywords

    Vertical tax competition; pass-through; market structure; excise taxes; tax incidence;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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