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Taxes and Market Power: A Principal Components Approach

Galeotti, Andrea and Golub, Benjamin and Goyal, Sanjeev and Talamàs, Eduard and Tamuz, Omer (2021) Taxes and Market Power: A Principal Components Approach. . (Unpublished)

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Suppliers of differentiated goods make simultaneous pricing decisions, which are strategically linked. Because of market power, the equilibrium is inefficient. We study how a policymaker should target a budget-balanced tax-and-subsidy policy to increase welfare. A key tool is a certain basis for the goods space, determined by the network of interactions among suppliers. It consists of eigenbundles -- orthogonal in the sense that a tax on any eigenbundle passes through only to its own price -- with pass-through coefficients determined by associated eigenvalues. Our basis permits a simple characterization of optimal interventions. A planner maximizing consumer surplus should tax eigenbundles with low pass-through and subsidize ones with high pass-through. The Pigouvian leverage of the system -- the gain in consumer surplus achievable by an optimal tax scheme -- depends only on the dispersion of the eigenvalues of the matrix of strategic interactions. We interpret these results in terms of the network structure of the market.

Item Type:Report or Paper (Discussion Paper)
Related URLs:
URLURL TypeDescription Paper
Galeotti, Andrea0000-0002-3071-9767
Talamàs, Eduard0000-0002-9128-0532
Tamuz, Omer0000-0002-0111-0418
Additional Information:Attribution 4.0 International (CC BY 4.0). This work was supported by the ERC grant 724356 (Galeotti), the Pershing Square Fund for Research on the Foundations of Human Behavior (Golub), the National Science Foundation (SES-1658940, SES-1629446, Golub & DMS-1944153, Tamuz), the Sloan Foundation (Tamuz) and the US-Israel Binational Science Foundation (2018397, Tamuz).
Funding AgencyGrant Number
European Research Council (ERC)724356
Pershing Square Fund for Research on the Foundations of Human BehaviorUNSPECIFIED
Alfred P. Sloan FoundationUNSPECIFIED
Binational Science Foundation (USA-Israel)2018397
Record Number:CaltechAUTHORS:20220707-170547552
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:115370
Deposited By: George Porter
Deposited On:07 Jul 2022 19:36
Last Modified:07 Jul 2022 19:36

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