Indirect Taxation in Vertical Oligopoly

51 Pages Posted: 19 Mar 2009

See all articles by Martin Peitz

Martin Peitz

University of Mannheim - Department of Economics

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2009

Abstract

This paper analyzes the effects of specific and ad valorem taxation in an industry with downstream and upstream oligopoly. We find that in the short run, i.e. when the number of firms in both markets is exogenous, the results concerning tax incidence tend to be qualitatively similar to models where the upstream market is perfectly competitive. However, both over- and under-shifting are more pronounced, potentially to a very large extent. Instead, in the long run under endogenous entry and exit over-shifting of both taxes is more likely to occur and is more pronounced under upstream oligopoly. As a result of this, a tax increase is more likely to be welfare reducing. We also demonstrate that downstream and upstream taxation are equivalent in the short run while this is not true for the ad valorem tax in the long run. We show that it is normally more efficient to tax downstream.

Keywords: specific tax, ad valorem tax, value-added tax, tax incidence, tax efficiency, indirect taxation, imperfect competition, vertical oligopoly

JEL Classification: D43, H21, H22, L13

Suggested Citation

Peitz, Martin and Reisinger, Markus, Indirect Taxation in Vertical Oligopoly (March 1, 2009). CESifo Working Paper Series No. 2583. Available at SSRN: https://ssrn.com/abstract=1365121

Martin Peitz (Contact Author)

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181-1835 (Phone)

HOME PAGE: http://peitz.vwl.uni-mannheim.de/

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department ( email )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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