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Specific taxation, asymmetric costs, and endogenous quality
Author(s) -
Schröder Philipp J. H.,
Sørensen Allan
Publication year - 2021
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12491
Subject(s) - monopolistic competition , economics , microeconomics , industrial organization , quality (philosophy) , productivity , economies of scale , competition (biology) , economies of scope , fixed cost , production (economics) , monopoly , ecology , philosophy , epistemology , biology , macroeconomics
This paper shows how a specific tax—in contrast to an ad valorem tax—alters industry structure and firm‐level performance in a monopolistic competition framework, where firms chose product quality endogenously and differ exogenously in productivity (i.e., marginal production efficiency). Industry equilibrium mechanisms and selection based on productivity play a significant role: A specific tax shifts market shares and profits toward firms with costs and prices above the industry average at the expense of low‐cost firms. This reallocation of market shares releases a novel scale effect such that low‐cost firms may quality downgrade, while high‐cost firms always quality upgrade. There exists a parameter subspace, where this combines to a decrease on average quality for the industry. In comparison: An ad valorem tax only reduces the number of firms/varieties in the industry due to demand absorption, but affects neither firm‐level performance nor industry structure.