Taxation and strategic reaction: a comparison of Cournot, Stackelberg and collusion

Tamara Todorova () and Besar Vatoci
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Besar Vatoci: Department of Economics, American University in Bulgaria

Turkish Economic Review, 2020, vol. 7, issue 2, 73-90

Abstract: We study the effect of distortionary taxes on three types of market structure: Cournot duopoly, Stackelberg duopoly, and a monopoly under a collusive agreement between the two rival firms in the industry. We investigate different tax regimes such as a per unit tax, an ad valorem tax and a tax on total revenue. A unit tax rate reduces optimal output and profits for firms while market price rises with the imposition of the tax. Interestingly, the optimal tax rate is the same for all three market structures. The ad valorem tax is imposed on the value of the product and is mostly borne by the Stackelberg follower who ends up producing a greater output than what he would produce in the absence of a tax. The ad valorem tax increases firm output and reduces market price. The total revenue decreases output and increases industry price like the unit tax.

Keywords: Cournot duopoly; Stackelberg game; optimal tax rate; Lerner index. (search for similar items in EconPapers)
JEL-codes: D42 D43 H21 L12 L13 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Taxation and strategic reaction: A comparison of Cournot, Stackelberg and collusion (2020)
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