Market Power and the Laffer Curve

Miravete, Eugenio J, Seim, Katja and Thurk, Jeff (2018) Market Power and the Laffer Curve. Econometrica, 86 (5). pp. 1651-1687. ISSN 0012-9682

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    We study commodity taxation and characterize the Laffer curve, a trade-off between tax rates and revenue, in noncompetitive markets. Pricing in these markets leads to incomplete tax pass-through and agents re-optimize their purchase and pricing decisions in response to any tax change. We use detailed data from Pennsylvania, a state that monopolizes retail sales of alcoholic beverages, to estimate a model of demand for horizontally differentiated products that ties consumers' demographic characteristics to heterogeneous preferences for spirits. We find that under the state's current tax policy, spirits are overpriced. Distillers respond to decreases in the tax rate by increasing wholesale prices, which limits the state's revenue gain to only 13% of the incremental tax revenue predicted under the common assumption of perfect competition. The strategic response of noncompetitive firms to changes in taxation therefore flattens the Laffer curve significantly.

    Item Type: Article
    Uncontrolled Keywords: laffer curve,commodity taxation,market power,public monopoly pricing
    Faculty \ School: Faculty of Social Sciences > School of Economics
    Depositing User: LivePure Connector
    Date Deposited: 25 Jun 2018 09:30
    Last Modified: 09 Apr 2019 13:28
    DOI: 10.3982/ECTA12307

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