Taxation and strategic reaction: a comparison of Cournot, Stackelberg and collusion

We study the effect of distortionary taxes on three types of market structure Cournot duopoly, Stackelberg duopoly, anda monopoly under a collusive agreement between the two rival firms in the industry. We investigate different tax regimes such as a per unit tax, an ad valorem tax and a tax on total...

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Bibliographic Details
Published in:Turkish Economic Review 2020-06, Vol.7 (2), p.73
Main Authors: Tamara Peneva TODOROVA, VATOCI, Besar
Format: Article
Language:English
Subjects:
Ad valorem taxes
Market prices
Tax increases
Tax rates
Online Access:Get full text
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Summary:We study the effect of distortionary taxes on three types of market structure Cournot duopoly, Stackelberg duopoly, anda monopoly under a collusive agreement between the two rival firms in the industry. We investigate different tax regimes such as a per unit tax, an ad valorem tax and a tax on total revenue. A unit tax rate reduces optimaloutput and profits for firms while market price rises with the imposition of the tax.Interestingly, the optimal tax rate is the same for all three market structures. The ad valorem tax is imposed on the value of the product and is mostly borne by the Stackelberg follower who ends up producing a greater output than what he would produce in the absence of a tax. The ad valorem tax increases firm output and reduces market price. The total revenue decreases output and increases industry price like the unit tax.
ISSN:2149-0414
DOI:10.1453/ter.v7i2.2068