Income Effects and the Welfare Consequences of Tax in Differentiated Product Oligopoly

54 Pages Posted: 22 Jun 2015

See all articles by Rachel Griffith

Rachel Griffith

Institute for Fiscal Studies (IFS); University of Manchester; Centre for Economic Policy Research (CEPR)

Lars Nesheim

University College London; Institute for Fiscal Studies (IFS)

Martin O'Connell

Institute for Fiscal Studies (IFS)

Date Written: June 2015

Abstract

Random utility models are widely used to study consumer choice. The vast majority of applications make strong assumptions about the marginal utility of income, which restricts income effects, demand curvature and pass-through. We show that flexibly modeling income effects can be important, particularly if one is interested in the distributional effects of a policy change, even in a market in which, a priori, the expectation is that income effects will play a limited role. We allow for much more flexible forms of income effects than is common and we illustrate the implications by simulating the introduction of an excise tax.

Keywords: compensation variation, demand estimation, income effects, oligopoly, pass-through

JEL Classification: H20, L13

Suggested Citation

Griffith, Rachel and Nesheim, Lars and O'Connell, Martin, Income Effects and the Welfare Consequences of Tax in Differentiated Product Oligopoly (June 2015). CEPR Discussion Paper No. DP10670. Available at SSRN: https://ssrn.com/abstract=2621574

Rachel Griffith (Contact Author)

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London WC1E 7AE
United Kingdom
+44 20 7291 4800 (Phone)
+44 20 7323 4780 (Fax)

University of Manchester ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

HOME PAGE: http://www.ifs.org.uk/people/profile?id=37

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lars Nesheim

University College London ( email )

Gower Street
London
United Kingdom

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Martin O'Connell

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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