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Competition and pass-through on international markets: Firm-level evidence from VAT shocks

Bénassy-Quéré, Agnès; Carré, Martine; Andrade, Philippe (2010), Competition and pass-through on international markets: Firm-level evidence from VAT shocks, 59ème congrés de l'Association Française de Science Économique (AFSE), 2010-09, Nanterre, France

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VATPassThrough.pdf (239.1Kb)
Type
Communication / Conférence
Date
2010
Conference title
59ème congrés de l'Association Française de Science Économique (AFSE)
Conference date
2010-09
Conference city
Nanterre
Conference country
France
Pages
37
Metadata
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Author(s)
Bénassy-Quéré, Agnès
Carré, Martine
Andrade, Philippe
Abstract (EN)
We exploit French customs’ firm-level data to study how exporters pass a change in the VAT rate of one importing country through their prices. Looking at this reaction is of interest beyond a mere fiscal incidence analysis: VAT shocks provide instruments to identifying the extent of mark-up adjustment in exporting firms’ reaction to macroeconomic shocks. Indeed, and by contrast with more usual shocks, typically exchange rate fluctuations, variations in VAT rates leave the marginal cost of exporters unchanged. For a sample covering exportations to the Euro-area over the 1996-2005 period our estimates show that, on average, markups contract by 50% of the VAT hike one year after the shock, implying a pass-through to final prices of 50% of the shock as well. We furthermore exploit the individual dimension of the data to show that the extent of mark-up adjustment varies across firms and markets. More precisely it depends on the market power of an exporter, as measured by its relative market share, and competition on a given market, as measured by standard concentration indexes. These evidences are in line with a model featuring variable elasticity of demand and heterogeneous firms.
Subjects / Keywords
Export prices; markup adjustment; market share; market concentration; extensive margin; Value-Added Tax
JEL
F41 - Open Economy Macroeconomics
F14 - Empirical Studies of Trade
H21 - Efficiency; Optimal Taxation

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