Negative Tax Incidence with Multiproduct Firms

Anna D’Annunzio () and Antonio Russo ()
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Anna D’Annunzio: TBS Business School, CSEF (University Federico II) and Toulouse School of Economics
Antonio Russo: University of Sheffield and CESifo

No 2023008, Working Papers from The University of Sheffield, Department of Economics

Abstract: A fundamental result in the theory of commodity taxation is that taxes increase consumer prices and reduce supply, aggravating the distortions caused by market power. This result hinges on the assumption that each firm provides a single product. We study the effects of commodity taxes in presence of multiproduct firms that have market power. We consider a monopolist providing two goods and obtain simple conditions such that differentiated ad valorem tax reduce the prices and increases the supply of both goods, thereby increasing total surplus. We show that these conditions can hold in a variety of settings, including add-on pricing, multiproduct retailing with price advertising, intertemporal models with switching costs and two-sided markets. Differentiated unit taxes can induce prices to decrease (as the Edgeworth’s paradox states), but the quantity of the taxed good always decreases.

Keywords: Commodity taxation; tax incidence; multi-product firms (search for similar items in EconPapers)
JEL-codes: D42 H21 H22 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2023-03
New Economics Papers: this item is included in nep-com, nep-des, nep-mic, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2023008

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