Price Effect of Domestic Oil Tax Under Vertically-Related Markets Structure

Abstract

Domestic oil tax influences not only consumer price, but also oil company’s bid-ask spread and international oil price via vertically-related markets. Our empirical study found that, the domestic tax elasticity of international oil price in U.S., EU and Japan is negative, which means that increase in domestic oil tax in these countries will cause decrease in international oil price. While, impacts of domestic oil tax on consumer price are quite different for U.S., EU and Japan. It is found that the domestic tax elasticity of consumer price is negative in U.S., but positive in EU and Japan. An theoretical explanation is also explored for the reasonability of these empirical results. That is, domestic tax will cause both international oil price and the asking price of oil companies to fall when competition between oil companies is strong. By contrary, the price transmission elasticity of domestic oil tax is negative, and domestic tax will cause decrease in international oil price but large increase in the asking price of oil companies and consumer oil price in a relatively monopolistic market.

Keywords: Domestic oil tax, price effect, vertically-related markets structure, price transmission elasticity

JEL Classification: F12, L11, Q48