Browsing by Subject "vertical product differentiation"

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  • Lombardini-Riipinen, Chiara (2000)
    This paper studies the interaction between taxation and firms' voluntary overcompliance with environmental regulation. For this purpose, a duopoly model of vertical differentiation with fixed cost of environmental quality is used. Both the cases of partial and full market coverage are considered. The main results of this study are the following. First, an emission tax always increases overcompliance. An ad valorem tax always decreases overcompliance by the firm producing the high environmental quality product. An ad valorem tax may increase or decrease overcompliance by the firm producing the low environmental quality product: in the cases of partial coverage and full coverage with a corner solution overcompliance decreases, while in the case of full coverage with an interior solution overcompliance increases. Second, an emission tax always decreases the degree of product differentiation. An ad valorem tax either decreases or leaves unaffected the degree of differentiation, depending on whether the market is fully or partially covered. Third, an ad valorem tax always leads to an increase in pollution. An emission tax may increase or decrease pollution. When the market is fully covered, pollution always decreases with an emission tax. When the market is partially covered, an emission tax reduces the level of emissions per unit of production, but simultaneously increases output. Nevertheless, pollution may decrease with an emission tax under partial coverage, provided that the investment in pollution abatement by the high quality firm is large enough. Fourth, social welfare increases with an emission tax and decreases with an ad valorem tax when the market is partially covered and if the degree of product differentiation is high enough. Under full coverage, whether an emission and an ad valorem tax increase welfare depends on the degree of consumers' heterogeneity. When the degree of consumer heterogeneity is high enough, an emission tax increases and an ad valorem tax decreases welfare. When the degree of consumer heterogeneity is low, the opposite is true: an emission tax decreases welfare while an ad valorem tax increases it.
  • Hongisto, Jonatan (2003)
    This thesis examines the regulation of a vertically differentiated market by Minimum Quality Standards (MQS) and commodity taxation. The research problem is: Does there exist a simple regulatory mechanism or policy instrument that would improve the overall efficiency and social welfare of a vertically differentiated product market? It is divided into three sub-problems: 1. What causes market inefficiencies in a vertically differentiated market? 2. How can Minimum Quality Standards affect the market outcome and the social welfare? 3. How can different taxation schemes affect the market outcome and the social welfare? In order to answer the research problems, a literature study and analysis of the reviewed theories was carried out. Main sources include Crampes – Hollander (1995) for a basic duopoly model and implications of a MQS, Ecchia et al. (2001) for a broad review of MQS literature, and Cremer – Thisse (1994) for a study of ad valorem taxation under vertically differentiation. It was shown that in a vertically differentiated duopoly firms do not offer an optimal mix of product qualities as they try to relax the price competition and increase their profits by differentiating their products as much as possible. In the unregulated equilibrium, the lower quality is too low and high quality too high. A sufficiently low MQS may be welfare improving as it reduces the quality dispersion of the differentiated products, thus forcing a harder price competition. Similarly, a small ad valorem tax is welfare improving, but a large tax may begin to decrease the social welfare, in which case, if tax revenue requirements are high enough, a unit tax may actually be preferable. Thus, MQSs and taxation both reduce the quality difference, taxation by lowering and MQSs by increasing both qualities. Therefore I speculate on a solution using both instruments simultaneously - a MQS to raise one and taxation to decrease the other quality. This study contributes to existing knowledge by providing a combined analysis of MQS and commodity taxation, by showing formal proofs for the results and third, by proposing a hypothesis for a combined use of MQS and taxes for achieving the first-best optimum.