Abstract
We analyze unit and ad valorem taxes in Edgeworth-Bertrand duopoly. In Edgeworth-Bertrand duopoly the mode of competition is endogenous through firms’ choice of capacity (Maggi, 1996). We show how commodity taxes co-determine capacity and thus competition intensity. In particular, we argue that shifts from ad valorem taxes towards unit taxes increase competition. We show that this effect can reverse the conventional preference for ad valorem taxation.
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