Document Type

Working Paper

Publication Date

8-13-2009

Working Paper Number

WP #07007, April 2007 revised August 2009; Old working paper #12780

Abstract

The welfare dominance of ad valorem taxes over unit taxes in a single-market Cournot oligopoly is well-known. This article extends the analysis to multi-market oligopoly. Provided all ad valorem taxes are positive, unit costs are constant, firms are active in all considered markets, and a representative consumer has convex preferences, it is shown that ad valorem taxes dominate in multi-product equilibrium. We discuss the role of unit cost covariances across multi-product firms in determining the extent of cost efficiencies arising under ad valorem taxation. The issue of merger under oligopoly is also considered. Conditions are identified under which a merger increases the sum of consumer and producer surpluses while also increasing the revenue yield from a set of unit taxes. If not all firms are active in all considered markets, then it is also shown that additional conditions are required to ensure the dominance of ad valorem taxes. In multi-input Cournot oligopsony, however, unit taxation welfare dominates. This is because ad valorem taxes on inputs reduce demand elasticities, amplifying market power distortions.

Publication Status

Published in Journal of Public Economic Theory, Vol. 13 no. 1 (February 2011): 125-138.

JEL Classification

H21, D43

File Format

application/pdf

Length

33 pages

File Function

Revised: August 2009 (Original version: April 2007)

Included in

Economics Commons

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