How Sales Taxes Affect Customer and Firm Behavior: The Role of Search on the Internet

When a multichannel retailer opens its first retail store in a state, the firm is obligated to collect sales taxes on all Internet and catalog orders shipped to that state. This article assesses how opening a store affects Internet and catalog demand. The authors analyze purchase behavior among customers who live far from the retail store but must now pay sales taxes on catalog and Internet purchases. A comparable group of customers in a neighboring state serves as a control. The results show that Internet sales decrease significantly, but catalog sales are unaffected. Further investigation indicates that the difference in these outcomes is partly attributable to the ease with which customers can search for lower prices at competing retailers. The authors extend the analysis to a panel of multichannel firms and show that retailers that earn a large proportion of their revenue from direct channels avoid opening a first store in high-tax states. They conclude that current U.S. sales taxes laws have significant effects on both customer and firm behavior

Bias and Variance Approximation in Value Function Estimates

We consider a finite-state, finite-action, infinite-horizon, discounted reward Markov decision process and study the bias and variance in the value function estimates that result from empirical estimates of the model parameters. We provide closed-form approximations for the bias and variance, which can then be used to derive confidence intervals around the value function estimates. We illustrate and validate our findings using a large database describing the transaction and mailing histories for customers of a mail-order catalog firm.value function, confidence interval, variance, bias