Estimating the Effects of Tax Reform in Differentiated Product Oligopolistic Markets

Chaim Fershtman (), Neil Gandal and Sarit Markovich

No 2107, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The incidence of taxation and the design of an optimal tax system have been extensively discussed in the public finance literature but mainly within a competitive market setting or within a homogenous good (Cournot type) oligopoly. In a differentiated product oligopoly, the effect of taxation can be more complex as the rate of taxation may affect not only the prices, but also the profile and quality of products that are sold in the market. In this paper, we examine the effects of changing tax regimes in a differentiated product oligopoly. In order to illustrate our approach, we employ data from one such market: the automobile market in Israel. The analysis involves two steps. We first estimate the Nash equilibrium in a differentiated product oligopoly and then use the results to simulate the new equilibrium under different tax regimes. Using the estimated parameters from the current market equilibrium, we examine the effect of changes in tax policy on tax incidence, market prices, sales (and the types of cars sold in the market), consumer surplus, firms' profits, as well as government revenues.

Keywords: differentiated product oligopoly; Taxation (search for similar items in EconPapers)
JEL-codes: H2 L8 (search for similar items in EconPapers)
Date: 1999-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Working Paper: Estimating the Effect of Tax Reform in Differentiated Product Oligopolistic Markets (1997)
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