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Product Diversity, Strategic Interactions and Optimal Taxation

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Abstract

The entry of a new product increases consumer surplus through additional product di- versity but decreases firm profits. In markets where .rm entry intensi.es competition and reduces markups through strategic interactions, we expect entry to be excessively high. In a simple general equilibrium model, this is true for industries with very similar goods. If goods are instead highly differentiated, entry is below optimum. In both cases, the optimal policy is a labour subsidy and a tax on entry. If labour subsidies are unavailable, subsidising entry is optimal for industries with low degrees of product differentiation.

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  • V. Lewis, 2010. "Product Diversity, Strategic Interactions and Optimal Taxation," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/661, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:10/661
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    File URL: http://wps-feb.ugent.be/Papers/wp_10_661.pdf
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    References listed on IDEAS

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    Cited by:

    1. Lewis, Vivien, 2013. "Optimal Monetary Policy And Firm Entry," Macroeconomic Dynamics, Cambridge University Press, vol. 17(8), pages 1687-1710, December.
    2. Vivien Lewis & Roland Winkler, 2015. "Product Diversity, Demand Structures, And Optimal Taxation," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 979-1003, April.
    3. Iwaisako, Tatsuro, 2019. "Welfare analysis of uniform entry tax in a general equilibrium model with heterogeneous industries," Economics Letters, Elsevier, vol. 178(C), pages 54-57.

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    More about this item

    Keywords

    product diversity; entry; strategic interactions; optimal taxation;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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