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Taxation and the Sustainability of Collusion: Ad Valorem versus Specific Taxes

Helmuts Azacis () and David Collie

No E2014/15, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: Assuming constant marginal cost, it is shown that a switch from specific to ad valorem taxation has no effect on the critical discount factor required to sustain collusion. This result is shown to hold for Cournot oligopoly as well as for Bertrand 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. However, in contrast to Colombo and Labrecciosa (2013), it is shown that 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)
New Economics Papers: this item is included in nep-com, nep-ger, nep-gth, nep-pbe and nep-pub
Date: 2014-09
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