Quality-Based Price Discrimination and Tax Incidence: Evidence from Gasoline and Diesel Cars

Abstract

The existing tax policies toward gasoline and diesel cars in European countries provide a unique opportunity to analyze quality-based price discrimination and the implied tax incidence. In my econometric framework, consumers choose the type of engine based on their annual mileage; prices are set by the manufacturers. The relative pricing of gasoline and diesel cars appears to be consistent with monopolistic price discrimination, effectively segmenting low-mileage from high-mileage consumers. On average, about 75% to 90% of the price differentials between gasoline and diesel cars can be explained by markup differences. I draw implications for the effectiveness and the revenue effects of tax policy.