The analysis of tax incidence in models of imperfect competition has received little attention given the importance of indirect taxes as one of the main contributors to tax revenue. The polar cases of monopoly and perfect competition, however, are well kn own, but studies of tax shifting in oligopoly are scant. A notable exception is Dierickx, Matutes and Neven (1998) who study how ad valorem and specific taxes affect market shares and profitability under Cournot competition when costs differ across firms. Keen and Delipalla (1992) undertake a welfare analysis of ad valorem and specific taxes in two models of oligopoly, with and without free entry. Except for these studies, the other papers in public finance that deal with oligopoly and indirect taxation a re mere special cases of results obtained in Delipalla and Keen.
The literature on two-part tariffs was pioneered by Oi (1971), but the public finance literature has paid very little attention to it and its implication for indirect taxation and tax incidence analysis. Two exceptions are Damus (1981) and Cheung (1998). Damus (1981) studies a special case of two-part tariffs used by US railways. Cheung’s paper is a welfare analysis that compares ad valorem to specific taxes when the authoiritie s maximize tax revenue. Hence, it does not focus on how taxes are shifted or how taxes affect the profitability in industries that use two part tariffs. The project will set up a model that can analyze how indirect taxes affect two-part tariff price stru ctures. Of particular interest is to see if taxes are shifted onto the fixed fee or the price the consumer has to pay for the product. Another issue to be studied is how indirect taxes affect the profitability of firms that use two-part tariff price struc tures.