Tax responses in platform industries

Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known result of tax incidence is that consumers of a more heavily taxed good pay a higher pric...

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Bibliographic Details
Published in:Oxford economic papers 2010-10, Vol.62 (4), p.764-783
Main Authors: Kind, Hans Jarle, Koethenbuerger, Marko, Schjelderup, Guttorm
Format: Article
Language:English
Subjects:
Ad valorem taxes
Advertising
Business networks
Consumer advertising
Consumer behaviour
D43
Goods
H21
H22
L13
Marginal costs
Market prices
Marketing
Marketing research
Network industries
Price formation
Price increases
Pricing
Pricing policies
Product differentiation
Sales taxes
Studies
Tax rates
Taxation
Value added taxes
VAT
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Summary:Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known result of tax incidence is that consumers of a more heavily taxed good pay a higher price and thus buy less of the good. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad valorem tax may lower end-user prices and spur sales. Thus, two-sided platform firms may not at all engage in tax shifting via price increases. We further show that a higher ad valorem tax may undermine a firm's incentive to differentiate its product from that of its competitors. Finally, we demonstrate that the effects of increasing specific taxes may be the opposite of those of increasing value added taxes.
ISSN:0030-7653
1464-3812
DOI:10.1093/oep/gpq008