Tax Incidence in Differentiated Product Oligopoly

Abstract

We analyze the incidence of ad valorem and unit excise taxes in an oligopolistic industry with differentiated products and price-setting (Bertrand) firms. Both taxes may be passed on to consumers by more than 100 percent, and an increase in the tax rate can increase short run firm profits (and hence the long run number of firms). We provide summary conditions for these effects to arise. The conditions depend on demand curvatures and are written in elasticity form. Surprisingly, the analysis largely corroborates Cournot results with homogeneous demand.Excise tax, unit tax, specific tax, ad valorem tax, imperfect competition, product differentiation, Bertrand, oligopoly, tax incidence, discrete choice models