Firm Types, Price-Setting Strategies, and Consumption-Tax Incidence
53 Pages Posted: 21 Jan 2016
Date Written: December 17, 2015
Studying very detailed micro data collected around two different VAT reforms in Europe, we show that tax incidence is heavily dependent on the characteristics of the price-setting firms. The reforms generated bimodal price-change distributions; nearly all independent restaurants left prices unchanged whereas a substantial fraction of restaurants belonging to chains chose a complete passthrough. These differences cannot be explained by location, initial prices or other market-segment indicators. Instead, differences appear to arise because independent restaurants aim for (very) crude price ranges rather than fine-tuned optimized prices, whereas chains use more elaborate, coordinated pricing strategies.
Keywords: firm heterogeneity, VAT, price incidence, price setting, restaurants
JEL Classification: H220, H320, E310
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