Tax responses in platform industries

• 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
• ISSN: 0030-7653; 1464-3812
• DOI: 10.1093/oep/gpq008

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.