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Title: Estimating the Effects of Tax Reform in Differentiated Product Oligopolistic Markets

Author(s): Chaim Fershtman, Neil Gandal and Sarit Markovich

Publication Date: March 1999

Keyword(s): differentiated product oligopoly and Taxation

Programme Area(s): Industrial Organization and Public Economics

Abstract: The incidence of taxation and the design of an optimal tax system have been extensively discussed in the public finance literature but mainly within a competitive market setting or within a homogenous good (Cournot type) oligopoly. In a differentiated product oligopoly, the effect of taxation can be more complex as the rate of taxation may affect not only the prices, but also the profile and quality of products that are sold in the market. In this paper, we examine the effects of changing tax regimes in a differentiated product oligopoly. In order to illustrate our approach, we employ data from one such market: the automobile market in Israel. The analysis involves two steps. We first estimate the Nash equilibrium in a differentiated product oligopoly and then use the results to simulate the new equilibrium under different tax regimes. Using the estimated parameters from the current market equilibrium, we examine the effect of changes in tax policy on tax incidence, market prices, sales (and the types of cars sold in the market), consumer surplus, firms' profits, as well as government revenues.

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Bibliographic Reference

Fershtman, C, Gandal, N and Markovich, S. 1999. 'Estimating the Effects of Tax Reform in Differentiated Product Oligopolistic Markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2107