Product Diversity, Strategic Interactions and Optimal Taxation

Vivien Lewis

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: The entry of a new product increases consumer surplus through additional product di- versity but decreases firm profits. In markets where .rm entry intensi.es competition and reduces markups through strategic interactions, we expect entry to be excessively high. In a simple general equilibrium model, this is true for industries with very similar goods. If goods are instead highly differentiated, entry is below optimum. In both cases, the optimal policy is a labour subsidy and a tax on entry. If labour subsidies are unavailable, subsidising entry is optimal for industries with low degrees of product differentiation.

Keywords: product diversity; entry; strategic interactions; optimal taxation (search for similar items in EconPapers)
JEL-codes: E22 E61 E62 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2010-07
New Economics Papers: this item is included in nep-com, nep-ent and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:10/661

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