Indirect taxation and consumer welfare in an asymmetric Stackelberg oligopoly

Abstract

This paper studies undesirable competition in an asymmetric Stackelberg oligopoly under both unit and ad valorem taxation. We find that (i) under unit taxation, a rise in the number of inefficient followers hurts consumers, but the harm to consumer welfare is less severe than that under Cournot competition; (ii) under ad valorem taxation, in addition to the entry of inefficient followers, a rise in the number of efficient leaders may also hurt consumers. The harm to consumer welfare could be more severe than that under Cournot competition when the cost difference between leaders and followers is large; (iii) unit taxation yields higher consumer welfare in comparison to ad valorem taxation. Our result is important for competition policy.