Multi-Dimensional Pass-Through and Welfare Measures under Imperfect Competition

Abstract

This paper provides a comprehensive analysis of welfare measures when oligopolistic firms face multiple policy interventions and external changes under general forms of market demands, production costs, and imperfect competition. We present our results in terms of two welfare measures, namely, marginal cost of public funds and incidence, in relation to multi-dimensional pass-through. Our arguments are best understood with two-dimensional taxation where homogeneous firms face unit and ad valorem taxes. The first part of the paper studies this leading case. We show, e.g., that there exists a simple and empirically relevant set of sufficient statistics for the marginal cost of public funds, namely unit tax and ad valorem pass-through and industry demand elasticity. We then specialize our general setting to the case of price or quantity competition and show how the marginal cost of public funds and the pass-through are expressed using elasticities and curvatures of regular and inverse demands. Based on the results of the leading case, the second part of the paper presents a generalization with the tax revenue function specified as a general function parameterized by a vector of multi-dimensional tax parameters. We then argue that our results are carried over to the case of heterogeneous firms and other extensions.

Keywords: Oligopoly, Pass-through, Multi-dimensional interventions, Taxation

JEL Classification: D43, H22, L13