Differential Effects of Taxation in Cournot and Bertrand Models of Duopoly: an Example

Abstract

The effects of equal revenue excise taxes in Bertrand and Cournot duopolies with product differentiation are compared. If firms have linear demand and cost functions and own price effects dominate cross price effects, then the fraction of any tax shifted to consumers is not smaller with Bertrand behavior; for taxes raising equal revenue, output effects and excess burden are not smaller if firms follow a Cournot quantity strategy. Incidence, output effects, and excess burden are equal only if goods are independent. For any given excise tax, firms' profits are greater with Cournot competition if goods are complements and greater with Bertrand competition if goods are complements. Thus, if firms choose the form of strategic interaction that maximizes equilibrium profits, taxation of complements is more efficient than taxation of substitutes.