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Estimating tax incidence, market power and market conduct: The European cigarette industry

Publication Source

Delipalla, S., O’Donnell, O. 2000

Publication Title

International Journal of Industrial Organization

Publication Type

Journal article

e-lib-feature-image

Metadata

Region

Europe

Economy status

High-income economies

Tags Spain, Ireland, Europe, Belgium, France, Netherlands, Italy, Greece, High-income economies, Journal article, United Kingdom, Luxembourg, European Union (EU), Denmark, Germany, Portugal

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Abstract

Recent theoretical work has shown that the incidence of ad valorem and specific taxes may differ and each may be over or under-shifted onto consumers in the presence of imperfect competition. These results are used to derive a method of estimating market power and conduct. An application is made to the European cigarette industry. Previous empirical comparison of the incidence of ad valorem and specific taxes is limited. For a group of countries with broadly similar cigarette industries, there is evidence of undershifting of both taxes, with the specific tax having a significantly greater impact on price. The extremes of both perfect competition and monopoly can be rejected. Behaviour is no less competitive than the equivalent of Cournot.