A Welfare and Pass-Through Effects of Regulations within Imperfect Competition

Ellalee, Haider and Alali, Walid Y. (2022): A Welfare and Pass-Through Effects of Regulations within Imperfect Competition.

Abstract

This paper furnishes an inclusive framework to examine the welfare effects of the interventions of multiple policies, and other exterior alterations under imperfect competition and an assertion on particular and .the leading case of the ad valorem taxes. In particular, for the tax pass-through, we furnish ‘‘sufficient statistics” equations for measures of the two welfare under the demand of the impartially general class, market competition and production cost. The measures are i) Public fund of the marginal value, ii) Incidence. We start with the status of symmetric firms' face up with both ad valorem taxes and unit tax to derive an empirically pertinent set of formulas and simple. Next, we make a substantial generalization of these results to include firm heterogeneity using the idea of tax revenue defined as a public function defined by a vector of policy instruments including governmental and non-governmental interventions and other non-tax costs.

• Item Type: MPRA Paper
• Language: English
• Keywords: Imperfect Competition, Pass-through, Marginal Value of Public, Funds, Incidence, Sufficient Statistics
• Subjects: A - General Economics and Teaching > A2 - Economic Education and Teaching of Economics; D - Microeconomics > D6 - Welfare Economics; F - International Economics > F3 - International Finance

References

Adachi, T., 2020. Hong and Li meet Weyl and Fabinger: Modeling vertical structure by the conduct parameter approach. Econ. Lett. 186, 108732. https://doi.org/10.1016/j.econlet.2019.108732.

Adachi, T., 2022. A sufficient statistics approach for welfare analysis of oligopolistic third-degree price discrimination. Unpublished.

Adachi, T., Tremblay, M.J., 2020. Business-to-business bargaining in two-sided markets. Eur. Econ. Rev. 130, 103591. https://doi.org/10.1016/j. euroecorev.2020.103591.

Aguirre, I., Cowan, S., Vickers, J., 2010. Monopoly price discrimination and demand curvature. Am. Econ. Rev. 100 (4), 1601–1615. https://doi.org/10.1257/ aer.100.4.1601.

Anderson, S.P., de Palma, A., Kreider, B., 2001a. Tax incidence in differentiated product oligopoly. J. Public Econ. 81 (2), 173–192. https://doi.org/10.1016/ S0047-2727(00)00079-7.

Anderson, S.P., de Palma, A., Kreider, B., 2001b. The efficiency of indirect taxes under imperfect competition. J. Public Econ. 81 (2), 231–251. https://doi.org/10.1016/ S0047-2727(00)00085-2.

Anderson, S.P., de Palma, A., Thisse, J.-F. 1992. Discrete Choice Theory of Product Differentiation. The MIT Press.

Atkin, D., Donaldson, D., 2016. Who’s getting globalized? The size and implications of intra-national trade costs. Unpublished.

Atkinson, A.B., Stern, N.H., 1974. Pigou, taxation and public goods. Rev. Econ. Stud. 41 (1), 119–128. https://doi.org/10.2307/2296403.

Auerbach, A., Hines, J., 2002. Taxation and economic efficiency. In A. Auerbach and M. Feldstein (eds.), Handbook of Public Economics, Vol. 3, Amsterdam, The Netherlands: Elsevier Science Publishers B.V., 1347–1421.

Azar, J., Vives, X., 2021. General equilibrium oligopoly and ownership structure. Econometrica 89 (3), 999–1048. https://doi.org/10.3982/ECTA17906.

Berry, S.T., 1994. Estimating discrete-choice models of product differentiation. RAND Journal of Economics, 25(2), 242–262.

Bonnet, C., Réquillart, V., 2013. Tax incidence with strategic firms in the soft drink market. J. Public Econ. 106, 77–88. https://doi.org/10.1016/j. jpubeco.2013.06.010.

Bresnahan, T.F., 1989. Empirical studies of industries with market power. In R. Schmalensee and R.D. Willig (eds.), Handbook of Industrial Organization, Vol. 2. Amsterdam, The Netherlands: Elsevier Science Publishers B.V., 1011–1057. Browning, E.K., 1976. The marginal cost of public funds. J. Polit. Econ. 84 (2), 283–298. https://doi.org/10.1086/260432.

Buchanan, J.M., Tullock, G., 1965. Public and private interaction under reciprocal externality. In J. Margolis (ed.), The Public Economy of Urban Communities, Resources for the Future, 52–73.

Campos-Vázquez, R.M., Medina-Cortina, E.M., 2019. Pass-through and competition: The impact of soft drink taxes using Mexican supermarket stores. Latin. Am. Econ. Rev. 28, Article 3. https://doi.org/10.1186/s40503-019-0065-5.

Chetty, R., 2009. Sufficient statistics for welfare analysis: A bridge between structural and reduced-form methods. Annu. Rev. Econ. 1, 451–488. https:// doi.org/10.1146/annurev.economics.050708.142910.

Conlon, C.T., Rao, N.S., 2020. Discrete prices and the incidence and efficiency of excise taxes. Am. Econ. J.: Econ. Policy 12 (4), 111–143. https://doi.org/10.1257/ pol.20160391.

Conlon. C.T., Rao, N.S., 2019. The price of liquor is too damn high: Alcohol taxation and market structure. Unpublished.

Cournot, A.-A., 1838. Recherches sur les principes mathématiques de la théorie des richesses. Chez L. Hachette.

d’Aspremont, C., Dos Santos Ferreira, R., 2021. The Economics of Competition, Collusion and In-between. Palgrave MacMillan.

Dahlby, B., 2008. The Marginal Cost of Public Funds: Theory and Applications. The MIT Press.

Delipalla, S., Keen, M., 1992. The comparison between ad valorem and specific taxation under imperfect competition. J. Public Econ. 49 (3), 351–367. https://doi.org/10.1016/0047-2727(92)90073-O.

Delipalla, S., O’Donnell, O., 2001. Estimating tax incidence, market power, and market conduct: The European cigarette industry. Int. J. Ind. Organ. 19 (6), 885– taxation under imperfect competition. J. Public Econ. 49 (3), 351–367. https://doi.org/10.1016/0047-2727(92)90073-O.

Delipalla, S., O’Donnell, O., 2001. Estimating tax incidence, market power, and market conduct: The European cigarette industry. Int. J. Ind. Organ. 19 (6), 885–908. https://doi.org/10.1016S0167-7187(99)00057-0.

Duso, T., Szücs, F., 2017. Market power and heterogeneous pass-through in German electricity retail. Eur. Econ. Rev. 98, 354–372. https://doi.org/10.1016/j. euroecorev.2017.07.010.

Finkelstein, A., Hendren, N., 2020. Welfare analysis meets causal inference. J. Econ. Perspect. 34 (4), 146–167. https://doi.org/10.1257/jep.34.4.146.

Fullerton, D., Metcalf, G.E., 2002. Tax incidence. In A. Auerbach and M. Feldstein (eds.), Handbook of Public Economics, Vol. 4, Amsterdam, The Netherlands: Elsevier Science Publishers B.V., 1787–1872.

Ganapati, S., Shapiro, J.S., Walker, R., 2020. Energy cost pass-through in U.S. manufacturing: Estimates and implications for carbon taxes. Am. Econ. J.: Appl. Econ. 12 (2), 303–342. https://doi.org/10.1257/app.20180474.

Ganapati, S., Shapiro, J.S., Walker, R., 2020. Energy cost pass-through in U.S. manufacturing: Estimates and implications for carbon taxes. Am. Econ. J.: Appl. Econ. 12 (2), 303–342. https://doi.org/10.1257/app.20180474.

Gaudin, G., 2018. Vertical bargaining and retail competition: What drives countervailing power. Econ. J. 128 (614), 2380–2413. https://doi.org/10.1111/ ecoj.12506.

Gaudin, G., 2018. Vertical bargaining and retail competition: What drives countervailing power. Econ. J. 128 (614), 2380–2413. https://doi.org/10.1111/ ecoj.12506.

Genakos, C., Pagliero, M., 2022. Competition and pass-through: Evidence from isolated markets. Am. Econ. J.: Appl. Econ., Forthcoming.

Genakos, C., Pagliero, M., 2022. Competition and pass-through: Evidence from isolated markets. Am. Econ. J.: Appl. Econ., Forthcoming.

Griffith, R., Nesheim, L., O’Connell, M., 2018. Income effects and the welfare consequences of tax in differentiated product oligopoly. Quantitative Economics 9 (1), 305–341. https://doi.org/10.3982/QE583.

Griffith, R., Nesheim, L., O’Connell, M., 2018. Income effects and the welfare consequences of tax in differentiated product oligopoly. Quantitative Economics 9 (1), 305–341. https://doi.org/10.3982/QE583.

Gruber, J., 2019. Public Finance and Public Policy, 6th Edition. Macmillan.

Häckner, J., Herzing, M., 2016. Welfare effects of taxation in oligopolistic markets. J. Econ. Theory 163, 141–166. https://doi.org/10.1016/j.jet.2016.01.007.

Häckner, J., Herzing, M., 2022. Tax incidence in oligopoly markets. Econ. Lett. 213, 110352. https://doi.org/10.1016/j.econlet.2022.110352.

Häckner, J., Herzing, M., 2016. Welfare effects of taxation in oligopolistic markets. J. Econ. Theory 163, 141–166. https://doi.org/10.1016/j.jet.2016.01.007.

Häckner, J., Herzing, M., 2022. Tax incidence in oligopoly markets. Econ. Lett. 213, 110352. https://doi.org/10.1016/j.econlet.2022.110352.

Hamilton, S.F., 1999. Tax incidence under oligopoly: A comparison of policy approaches. J. Public Econ. 71 (2), 233–245. https://doi.org/10.1016/S0047-2727(98)00066-8.

Hamilton, S.F., 1999. Tax incidence under oligopoly: A comparison of policy approaches. J. Public Econ. 71 (2), 233–245. https://doi.org/10.1016/S0047-2727(98)00066-8.

Harberger, A.C., 1962. The incidence of the corporation income tax. J. Polit. Econ. 70 (3), 215–240. https://doi.org/10.1086/258636.

Harberger, A.C., 1962. The incidence of the corporation income tax. J. Polit. Econ. 70 (3), 215–240. https://doi.org/10.1086/258636.

Hendren, N., 2016. The policy elasticity. Tax Policy and the Economy 30 (1), 51–89. https://doi.org/10.1086/685593.

Hendren, N., 2016. The policy elasticity. Tax Policy and the Economy 30 (1), 51–89. https://doi.org/10.1086/685593.

Hendren, N., Sprung-Keyser, B., 2020. A unified welfare analysis of government policies. Quart. J. Econ. 135 (3), 1209–1318. https://doi.org/10.1093/qje/qjaa006.

Hindriks. J., Myles, G.D., 2013. Intermediate Public Economics, 2nd Edition. The MIT Press.

Hendren, N., Sprung-Keyser, B., 2020. A unified welfare analysis of government policies. Quart. J. Econ. 135 (3), 1209–1318. https://doi.org/10.1093/qje/qjaa006.

Hindriks. J., Myles, G.D., 2013. Intermediate Public Economics, 2nd Edition. The MIT Press.

Hollenbeck, B., Uetake, K., 2021. Taxation and market power in the legal marijuana industry. RAND J. Econ. 52 (3), 559–595. https://doi.org/10.1111/1756-2171.12384.

Hollenbeck, B., Uetake, K., 2021. Taxation and market power in the legal marijuana industry. RAND J. Econ. 52 (3), 559–595. https://doi.org/10.1111/1756-2171.12384.

Holmes, T.J., 1989. The effects of third-degree price discrimination in oligopoly. American Economic Review, 79(1), 244–250.

Holmes, T.J., 1989. The effects of third-degree price discrimination in oligopoly. American Economic Review, 79(1), 244–250.

Hotelling, H., 1929. Stability in competition. Econ. J. 39 (153), 41–57. https://doi. org/10.2307/2224214.

Hotelling, H., 1929. Stability in competition. Econ. J. 39 (153), 41–57. https://doi. org/10.2307/2224214.

Jametti, M., Redonda, A., Sen, A., 2013. The power to pass on taxes – A test for tax shifting based on observables. Unpublished.

Jametti, M., Redonda, A., Sen, A., 2013. The power to pass on taxes – A test for tax shifting based on observables. Unpublished.

Johnson, D.B., Pauly, M.V., 1969. Excess burden and the voluntary theory of public finance. Economica 36 (143), 269–276. https://doi.org/10.2307/2551807.

Johnson, D.B., Pauly, M.V., 1969. Excess burden and the voluntary theory of public finance. Economica 36 (143), 269–276. https://doi.org/10.2307/2551807.

Keen, M., 1998. The balance between specific and ad valorem taxation. Fiscal Studies 19 (1), 1–37. https://doi.org/10.1111/j.1475-5890.1998. tb00274.x.

Keen, M., 1998. The balance between specific and ad valorem taxation. Fiscal Studies 19 (1), 1–37. https://doi.org/10.1111/j.1475-5890.1998. tb00274.x.

Kim, D., Cotterill, R.W., 2008. Cost pass-through in differentiated product markets: The case of U.S. processed cheese. J. Ind. Econ. 56 (1), 32–48. https://doi.org/10.1111/j.1467-6451.2008.00331.x.

Kim, D., Cotterill, R.W., 2008. Cost pass-through in differentiated product markets: The case of U.S. processed cheese. J. Ind. Econ. 56 (1), 32–48. https://doi.org/10.1111/j.1467-6451.2008.00331.x.

Kleven, H.J., 2021. Sufficient statistics revisited. Annu. Rev. Econ. 13, 515–538. https://doi.org/10.1146/annurev-economics-060220-023547.

Kleven, H.J., 2021. Sufficient statistics revisited. Annu. Rev. Econ. 13, 515–538. https://doi.org/10.1146/annurev-economics-060220-023547.

Kleven, H.J., Kreiner, C.T., 2006. The marginal cost of public funds: Hours of work versus labor force participation. J. Public Econ. 90 (10–11), 1955–1973. https:// doi.org/10.1016/j.jpubeco.2006.03.006.

Kleven, H.J., Kreiner, C.T., 2006. The marginal cost of public funds: Hours of work versus labor force participation. J. Public Econ. 90 (10–11), 1955–1973. https:// doi.org/10.1016/j.jpubeco.2006.03.006.

Kroft, K., Laliberté, J.-W.P., Leal-Vizcaíno, R., Notowidigdo, M.J., 2020. Salience and taxation with imperfect competition. Unpublished.

Kroft, K., Laliberté, J.-W.P., Leal-Vizcaíno, R., Notowidigdo, M.J., 2020. Salience and taxation with imperfect competition. Unpublished.

Lockwood, B., 2003. Imperfect competition, the marginal cost of public funds and public goods supply. J. Public Econ. 87 (7–8), 1719–1746. https://doi.org/10.1016/S0047-2727(01)00182-7.

Lockwood, B., 2003. Imperfect competition, the marginal cost of public funds and public goods supply. J. Public Econ. 87 (7–8), 1719–1746. https://doi.org/10.1016/S0047-2727(01)00182-7.

Mahoney, N., Weyl, E.G., 2017. Imperfect competition in selection markets. Rev. Econ. Stat. 99 (4), 637–651. https://doi.org/10.1162/REST_a_00661. Marshall, A., 1890. Principles of Economics. Macmillan.

Mahoney, N., Weyl, E.G., 2017. Imperfect competition in selection markets. Rev. Econ. Stat. 99 (4), 637–651. https://doi.org/10.1162/REST_a_00661. Marshall, A., 1890. Principles of Economics. Macmillan.

Mayshar, J., 1990. On measures of excess burden and their application. J. Public Econ. 43 (3), 263–289. https://doi.org/10.1016/0047-2727(90)90001-X.

Mayshar, J., 1990. On measures of excess burden and their application. J. Public Econ. 43 (3), 263–289. https://doi.org/10.1016/0047-2727(90)90001-X.

Menezes, F.M., Quiggin, J., 2020. The strategic industry supply curve. J. Ind. Econ. 68 (3), 523–555. https://doi.org/10.1111/joie.12229.

Miller, N.H., Osborne, M., Sheu, G., 2017. Pass-through in a concentrated industry: Empirical evidence and regulatory implications. RAND J. Econ. 48 (1), 69–93. https://doi.org/10.1111/1756-2171.12168.

Miravete, E.J., Seim, K., Thurk, J., 2018. Market power and the Laffer curve. Econometrica 86 (5), 1651–1687. https://doi.org/10.3982/ECTA12307.

Montag, F., Sagimuldina, A., Schnitzer, M., 2021. Does tax policy work when consumers have imperfect price information? Theory and evidence. Unpublished.

Muehlegger, E., Sweeney, R.L., 2022. Pass-through of own and rival cost shocks: Evidence from the U.S. fracking boom. Rev. Econ. Stat. https://doi.org/10.1162/ rest_a_01052. Forthcoming.

Myles, G.D., 1996. Imperfect competition and the optimal combination of ad valorem and specific taxation. Int. Tax Public Finance 3 (1), 29–44. https://doi. org/10.1007/BF00400145.

Paradisi, M., 2021. Firms and policy incidenece. Unpublished. Pigou, A.C., 1928. A Study in Public Finance. Macmillan.

Pirttilä, J., 2002. Specific versus ad valorem taxation and externalities. J. Econ. 76 (2), 177–187. https://doi.org/10.1007/s007120200035.

Riordan, M.H., 2008. Competitive effects of vertical integration. In: Buccirossi, P. (Ed.), Handbook of Antitrust Economics. The MIT Press, pp. 145–182.

Ritz, R.A., 2018. Oligopolistic competition and welfare. In L. Corchón and M. Marini (eds.), Handbook of Game Theory & Industrial Organization, Edward Elgar. Rosen, H.S., Gayer, T., 2014. Public Finance. McGraw Hill.

Shrestha, V., Markowitz, S., 2016. The pass-through of beer taxes to prices: Evidence from state and federal tax changes. Econ. Inq. 54 (4), 1946–1962. https://doi. org/10.1111/ecin.12343.

Skeath, S.E., Trandel, G.A., 1994. A Pareto comparison of ad valorem and unit taxes in noncompetitive environments. J. Public Econ. 53 (1), 53–71. https://doi.org/10.1016/0047-2727(94)90013-2.

Slemrod, J., Yitzhaki, S., 1996. The costs of taxation and the marginal efficiency cost of funds. International Monetary Fund Staff Papers, 43(1), 172–198.

Slemrod, J., Yitzhaki, S., 2001. Integrating expenditure and tax decisions: The marginal cost of funds and the marginal benefit of projects. National Tax J. 54 (2), 189–201. https://doi.org/10.17310/ntj.2001.2.01.

Stiglitz, J.E., Dasgupta, P., 1971. Differential taxation, public goods, and economic efficiency. Rev. Econ. Stud. 38 (2), 151–174. https://doi.org/10.2307/2296778. Stiglitz, J.E., Rosengard, J.K., 2015. Economics of the Public Sector, 4th Edition. W.W. Norton & Company, Inc.

Stolper, S., 2021. Local pass-through and the regressivity of taxes: Evidence from automotive fuel markets. Unpublished.

Suits, D.B., Musgrave, R.A., 1953. Ad valorem and unit taxes compared. Quart. J.Econ. 67 (4), 598–604. https://doi.org/10.2307/1883604.

Tresch, R.W., 2015. Public Finance: A Normative Theory, 3rd Edition. Academic Press.

Vickrey, W.W., 1963. General and specific financing of urban services. In: Shaller, H.G. (ed.), Public Expenditure Decisions in the Urban Community, Resources for the Future, 62–90.

Vives, X. 2000.Oligololy Pricing: Old Ideas and New Tools. The MIT Press.

Weyl, E.G., Fabinger, M., 2013. Pass-through as an economic tool: Principles of incidence under imperfect competition. J. Polit. Econ. 121 (3), 528–583. https:// doi.org/10.1086/670401.

Wicksell, K., 1896. Taxation in the monopoly case. In R.A. Musgrave and C.S. Shoup (eds.), Readings in the Economics of Taxation, London: Allen and Unwin, 1959, 256–257 (originally published as an appendix to Chapter 2, pp. 19–21, in K. Wicksell, Finanztheoretische Untersuchunfen, nebst Darstellung und Kritik des Steuerwesens Schwedens, Jena: Gustav Fisher).