Firm Types, Price-Setting Strategies, and Consumption-Tax Incidence

53 Pages Posted: 21 Jan 2016

See all articles by Jarkko Harju

Jarkko Harju

Government of the Republic of Finland - VATT Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies

Oskar Nordstrom Skans

Uppsala University; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 17, 2015

Abstract

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

Suggested Citation

Harju, Jarkko and Kosonen, Tuomas and Nordström Skans, Oskar, Firm Types, Price-Setting Strategies, and Consumption-Tax Incidence (December 17, 2015). CESifo Working Paper Series No. 5654, Available at SSRN: https://ssrn.com/abstract=2719449

Jarkko Harju (Contact Author)

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

Oskar Nordström Skans

Uppsala University ( email )

Box 513
Uppsala, 751 20
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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