Indirect Taxation in Vertical Oligopoly
51 Pages Posted: 19 Mar 2009
Date Written: March 1, 2009
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: Suggested Citation