Monopoly, Quantity Discounts, and Stepwise Taxation

Abstract

This paper investigates a stepwise tax/subsidy structure on a monopoly practicing quantity discounts. It covers four tax/subsidy systems: uniform and non-uniform schemes, each under specific and ad valorem regimes. The effects of an exogenous change in a tier's tax rate on the optimal tier sizes in all four systems are examined. For the social optimum, the paper finds that the last tier's consumer price must be set to the marginal cost. It also finds that the optimal tier-tax rates in all four systems are indeterminate, but they must be constrained by each system's optimal policy locus.

Keywords: Quantity discounts; Monopoly; Tax/Subsidy; Stepwise taxation scheme

JEL Classification: D21, D42, H21, L12