Pass-Through in a Multiproduct World
69 Pages Posted: 16 May 2018 Last revised: 1 Aug 2019
Date Written: March 1, 2019
The standard partial equilibrium formula for pass-through substantially mismeasures incidence in the presence of demand or supply interdependencies. We study general equilibrium tax incidence in a perfectly competitive, multiproduct setting. If only one product is taxed, the general equilibrium incidence will always be greater on the consumer than suggested by the standard incidence formula. If the tax changes on multiple related commodities, while maintaining perfect competition, a necessary condition for overshifting is that the related commodities are substitutes. Pass-through greater than one-hundred percent is not sufficient to infer market structure. When empirically estimating pass-through, pass-through estimates capture the direct effect of the tax on the market, the indirect feedback effects resulting from price and tax changes in other markets and taxation of inputs to production. Empirically applying our theory to estimate pass-through in alcohol markets, we show that demand interdependencies and simultaneous tax changes on related products are important.
Keywords: pass-through, tax incidence, multi-market, cascading, market structure
JEL Classification: H22, H25, L10, L50, D50
Suggested Citation: Suggested Citation