Perfect Competition, Spatial Competition, and Tax Incidence in the Retail Gasoline Market

33 Pages Posted: 9 Mar 2006  

James Alm

Tulane University

Edward Sennoga

Georgia State University - Department of Economics

Mark Skidmore

Michigan State University - Department of Agricultural Economics

Date Written: November 2005

Abstract

In this paper we use monthly gasoline price data for all fifty U.S. states over the period 1984 to 1999 to examine the incidence of state gasoline excise taxes. Standard economic theory predicts full shifting of the excise tax to consumers when the supply of gasoline is perfectly elastic, and our empirical results are largely consistent with this prediction. In general, we find full shifting of gasoline taxes to the final consumer, with changes in gasoline taxes fully reflected in the tax-inclusive gasoline price almost instantly, a result consistent with a retail gasoline market in which firms are perfectly competitive and produce at constant cost. In addition, although we find that gasoline retail prices demonstrate asymmetric responses to changes in gasoline wholesale prices, we find only limited evidence of such behavior for retail prices with respect to gasoline excise taxes. Importantly, we also present a novel application of a spatial price discrimination model to examine tax incidence in markets that are not perfectly competitive. In this alternative framework, the incidence of excise taxes depends upon the competitiveness of retail gasoline markets, which depends in turn on spatial aspects of the market. Consistent with this alternative theoretical framework, our empirical estimates demonstrate that gasoline markets in urban states exhibit full shifting, but those in rural states demonstrate somewhat less than full shifting.

Keywords: incidence, spatial competition, asymmetric response

JEL Classification: H22

Suggested Citation

Alm, James and Sennoga, Edward and Skidmore, Mark, Perfect Competition, Spatial Competition, and Tax Incidence in the Retail Gasoline Market (November 2005). Andrew Young School Research Paper No. 06-01. Available at SSRN: https://ssrn.com/abstract=889372 or http://dx.doi.org/10.2139/ssrn.889372

James Alm (Contact Author)

Tulane University ( email )

United States
5048628344 (Phone)

Edward Sennoga

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States
404-651-3818 (Phone)

Mark L. Skidmore

Michigan State University - Department of Agricultural Economics ( email )

East Lansing, MI 48824
United States

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