Indirect Taxation in Vertical Oligopoly

Martin Peitz and Markus Reisinger ()
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Markus Reisinger: Department of Economics, University of Mannheim, 68131 Mannheim, Germany

No 255, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper analyzes the effects of specific and ad valorem taxation in an industry with downstream and upstream oligopoly. We find that in the short run, i.e. when the number of firms in both markets is exogenous, the results concerning tax incidence tend to be qualitatively similar to models where the upstream market is perfectly competitive. However, both over- and undershifting are more pronounced, potentially to a very large extent. Instead, in the long run under endogenous entry and exit overshifting of both taxes is more likely to occur and is more pronounced under upstream oligopoly. As a result of this, a tax increase is more likely to be welfare reducing. We also demonstrate that downstream and upstream taxation are equivalent in the short run while this is not true for the ad valorem tax in the long run. We show that it is normally more efficient to tax downstream.

Keywords: Specific Tax; Ad Valorem Tax; Value-Added Tax; Tax Incidence; Tax Efficiency; Indirect Taxation; Imperfect Competition; Vertical Oligopoly. (search for similar items in EconPapers)
JEL-codes: D43 H21 H22 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-mic and nep-pub
Date: 2009-02
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Working Paper: Indirect Taxation in Vertical Oligopoly (2009)
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