Tacit collusion and international commodity taxation

Abstract

The paper employs a model of dynamic price competition to study how international commodity taxation affects the stability of collusive agreements when producers in an international duopoly agree not to export into each other's home market. We consider both the choice of international tax principle and the harmonization of tax rates and differentiate between a setting where production costs differ between countries, and a setting where exogenous tax rate differentials are the only asymmetry. The conclusions derived from this model differ strongly from those obtained under the assumption of competitive product markets.

Value‐added Tax in a Borderless Sa‐blns Region

“…Tax competition has been studied for countries of different (population) sizes (Kanbur & Keen, 1993) and different market structures (perfect and imperfect competition) (see Christiansen, 1994 and Haufler & Schjelderup, 2004). Kanbur and Keen (1993) focus primarily on the role of country size in shaping international tax relations.…”

“…International commodity tax policies may not only be affected by imperfect competition but may actually impact on the stability of collusive agreements between firms. In their paper, Haufler and Schjelderup (2004) show that tax differentials (including VAT differentials) between countries may weaken the common interest of firms in maintaining a socially harmful secret cartel. Similarly, Trandel (1992) shows that when firms charge a markup over marginal costs, cross‐border shopping will provide an incentive to firms to lower their prices which, of course, benefits consumers (it is welfare improving for both regions).…”

Trade liberalization, forward‐looking firms, and welfare

“…Most studies in this strand of the literature consider an intra‐industry model with firms selling a homogeneous product based on the framework of Brander and Krugman () . Examples are Pinto (), Schultz (), Haufler and Schjelderup (), and Bond and Syropoulos (), among others. Pinto () extends Brander and Krugman () by considering repeated interactions among quantity‐setting firms in both their domestic and export markets.…”

“…In addition, when the production technology of firms exhibits constant returns to scale, this will lead to firms that deviate being subject to greater punishment and result in the collusion becoming more stable. Haufler and Schjelderup () analyze the effects of international commodity tax policies on the stability of collusive agreements between firms, and also find that reducing the tax stabilizes the collusion among firms. Bond and Syropoulos () show that the relationship between collusive conduct and trade costs may be nonmonotonic depending on the magnitude of the trade costs.…”

International Oligopoly and the Taxation of Commerce with Revenue‐Constrained Governments

“…Richardson (1999) and Horn and Levinsohn (2001). The relationship between cartel formation and commodity tax policies is analysed in Haufler and Schjelderup (2004).…”