Unit vs. Ad Valorem Taxes in Multi-Product Cournot Oligopoly

Harvey E. Lapan and David A. Hennessy

Staff General Research Papers from Iowa State University, Department of Economics

Abstract: The welfare dominance of ad valorem taxes over unit taxes in a single-market Cournot oligopoly is well-known. This article extends the analysis to multi-market oligopoly. Provided all ad valorem taxes are positive, unit costs are constant, firms are active in all considered markets, and a representative consumer has convex preferences, it is shown that ad valorem taxes dominate in multi-product equilibrium. We discuss the role of unit cost covariances across multi-product firms in determining the extent of cost efficiencies arising under ad valorem taxation. The issue of merger under oligopoly is also considered. Conditions are identified under which a merger increases the sum of consumer and producer surpluses while also increasing the revenue yield from a set of unit taxes. If not all firms are active in all considered markets, then it is also shown that additional conditions are required to ensure the dominance of ad valorem taxes. In multi-input Cournot oligopsony, however, unit taxation welfare dominates. This is because ad valorem taxes on inputs reduce demand elasticities, amplifying market power distortions.

Keywords: ad valorem tax; imperfect competition; oligopoly merger; quantity-setting game; specific tax; tax efficiency; tax revenue (search for similar items in EconPapers)
JEL-codes: D4 H2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-mic, nep-pbe and nep-pub
Date: 2007-04-10
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Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:12780

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