Pass-through and tax incidence in differentiated product markets

Eugenio J. Miravete, Katja Seim and Jeff Thurk

International Journal of Industrial Organization, 2023, vol. 90, issue C

Abstract: The role of demand curvature in determining firm behavior in symmetric oligopolistic product markets is well-understood. We consider the empirically relevant discrete choice differentiated product demand and point to two forces that drive curvature in logit demand: the impact of outside-good spending on the consumer’s indirect utility and the heterogeneity in this response across consumers. We use the canonical example of the ready-to-eat cereal market (Nevo, 2000) to contrast elasticity and curvature estimates across several workhorse models. We illustrate that the log-concave Multinomial Logit and Nested Logit demands yield significantly biased curvature estimates. In contrast, a Mixed Logit specification generates a wider range of curvatures, including curvatures larger than one. These results are of immediate relevance to the robust assessment of tax incidence and the pass-through of cost savings, such as from a horizontal merger, in differentiated product markets.

Keywords: Market power; Demand curvature; Pass-Through; Tax incidence (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:90:y:2023:i:c:s0167718723000668

DOI: 10.1016/j.ijindorg.2023.102985

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