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Taxation and the sustainability of collusion: ad valorem versus specific taxes

Helmuts Azacis and David Collie
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Helmuts Azacis: Cardiff University

Journal of Economics, 2018, vol. 125, issue 2, 173-188

Abstract: Abstract Assuming constant marginal cost, it is shown that a switch from specific to ad valorem taxation that results in the same collusive price has no effect on the critical discount factor required to sustain collusion. This result is shown to hold for Cournot oligopoly when collusion is sustained with Nash-reversion strategies or optimal-punishment strategies. In a Cournot duopoly model with linear demand and quadratic costs, it is shown that the critical discount factor is lower with an ad valorem tax than with a specific tax that results in the same collusive price. However, in contrast to Colombo and Labrecciosa (J Public Econ 97:196–205, 2013) it is shown that the revenue is always higher with an ad valorem tax than with a specific tax.

Keywords: Taxes; Imperfect competition; Oligopoly; Cartel; Supergame (search for similar items in EconPapers)
JEL-codes: H21 H22 L13 L41 C72 C73 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Taxation and the Sustainability of Collusion: Ad Valorem versus Specific Taxes (2014) Downloads
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