Heterogeneous Tax-Cut Pass-Through and Market Structure

Yenjae Chang ()
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Yenjae Chang: Korea Energy Economics Institute

Review of Industrial Organization, 2025, vol. 66, issue 2, No 6, 233-259

Abstract: Abstract This paper estimates the effects of a motor fuel tax cut on retail prices and examines the role of market competition intensity in determining the pass-through rate. By employing a matched difference-in-differences strategy that uses nationwide panel data at the gas station level, I investigate how the magnitude of price reduction in response to the temporary tax reform in South Korea varies across local market structures. The results indicate a positive association between pass-through rates and the intensity of competition, with incomplete pass-through observed predominantly among firms that face fewer rivals. These findings offer an explanation for the incomplete tax-cut effects that are observed in energy and other consumption taxes and suggest that tax-reduction programs can benefit firms with local market power by increasing their profits, which thereby decreases the efficacy of fiscal policies that are aimed at reducing prices.

Keywords: Energy taxes; Tax-cuts; Cost pass-through; Market structure; Motor fuel taxes; Retail gasoline market (search for similar items in EconPapers)
JEL-codes: H20 H22 L11 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11151-024-09986-6

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