Indirect Taxation in Vertical Oligopoly

Abstract

This paper analyzes the effects of specific and ad valorem taxation in an industry with downstream and upstream oligopoly and endogenous entry in both layers. We find that it is typically more efficient to levy an ad valorem tax downstream than upstream, while it is immaterial on which layer a specific tax is levied. We also show that tax revenues should be raised only through ad valorem taxes. Furthermore, we provide conditions under which the introduction of an indirect tax improves welfare. From a total surplus perspective, excise taxes tend to appear in a less favorable light when the full vertical supply chain is considered compared to a partial analysis which only takes into account market power at one layer. Finally, we demonstrate that a tax tends to be shifted to a larger extent into the final consumer price in vertical oligopoly than in standard oligopoly.

Failure of ad valorem and specific tax equivalence under uncertainty

“…However, the findings for an ad valorem tax on output have been shown to carry over to a proper value-added tax with only slight modifications (cf. Peitz and Reisinger, 2011). In Appendix I we demonstrate that the results derived below also hold if we consider a value-added tax.…”

“…Peitz and Reisinger (2011) show that an ad valorem tax and a value-added tax are equivalent in a vertical oligopoly for a linear cost structure. Accordingly, their findings are compatible with our result.International Journal of Economic Theory 10 (2014) 387-402 © IAET…”

Multi‐part tariffs and differentiated commodity taxation

“…Generally, the welfare dominance of either instrument depends on market conditions, such as the degree of concentration and whether one considers Cournot or Bertrand equilibrium (Delipalla and Keen, 1992;Skeath and Trandel, 1994;Anderson, De Palma, and Kreider, 2001;Wang, Chou, and Liang, 2018). 4 Recently, Peitz and Reisinger (2014) show that it is more efficient to levy an ad valorem tax in the downstream than in the upstream market. 5 Wang and Wright (2017) show that ad valorem taxes allow efficient price discrimination across goods with different costs and values, unlike unit taxes.…”

Multi-Part Tariffs and Differentiated Commodity Taxation

“…Generally, the welfare dominance of either instrument depends on market conditions, such as the degree of concentration and whether one considers Cournot or Bertrand equilibrium (Delipalla and Keen, 1992;Skeath and Trandel, 1994;Anderson et al, 2001;Wang et al, 2018). 4 Recently, Peitz and Reisinger (2014) show that it is more efficient to levy an ad valorem tax in the downstream than in the upstream market. 5 Wang and Wright (2017) show that ad valorem taxes allow efficient price discrimination across goods with different costs and values, unlike unit taxes.…”