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Taxation under oligopoly is analysed in a general equilibrium setting where the
firms are large relative to the size of the economy and maximise the utility of
their shareholders. It turns out that the model is an aggregative game, which
simplifies the comparative statics for the effects of taxation. This novel analysis
of taxation leads to a number of counterintuitive results that challenge
conventional wisdom in microeconomics. A lump-sum tax may increase the
price of the oligopolistic good and decrease welfare whereas a profits tax may
decrease the price of the oligopolistic good and increase welfare. An ad valorem
tax may decrease the price of the oligopolistic good and increase welfare.
Furthermore, in line with conventional wisdom, total tax revenue is always
higher with an ad valorem tax than with a specific tax that leads to the same
price for the oligopolistic good.
