Is Sales Tax Included in the Price? Consumer Inattention and Price Competition

Oz Shy

No 2024-5, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: Sales tax is generally not included in the advertised price quoted to consumers in the United States. In contrast, value added taxes (VAT) are embedded into the price in most other countries. This article investigates how the two different pricing structures and consumers' decision-making process affect the intensity of price competition. The two pricing structures yield identical market outcomes with fast-computing consumers who are willing and able to recompute the exact sales tax each time there is a price change. With slow-computing consumers, prices and profits are higher when sellers quote and compete in prices without sales tax. In this case, a model extension with two-stage decision making shows that the entire tax burden is shifted to the consumers when they completely ignore sales tax during their initial search.

Keywords: price competition; price comparisons; sales tax; value added tax; fast and slow-computing consumers; mental accounting; inattention; consumer decision making (search for similar items in EconPapers)
JEL-codes: D43 H29 L13 M3 (search for similar items in EconPapers)
Pages: 25
Date: 2024-06-18
New Economics Papers: this item is included in nep-acc, nep-com and nep-mic
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Published in 2024

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:99031

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DOI: 10.29338/wp2024-05

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