Monopolistic vs. Oligopolistic Competition and the Role of Taxation

Abstract

This paper works out a model of inter-industry competition between monopolistic competition and non-monopolistically imperfectly competitive industry in terms of the difference between the growth rates of the number of firms in each industry. Monopolistic competition is combined with the homogeneous Cournot model, and in a highly simplified context, with heterogeneous Cournot, and heterogeneous Bertrand price competition. The introduction of income, ad valorem, and unit tax in this setting, is found to decrease inter-industry competition, increasing thereby industry-specific and overall market concentration to the benefit always of the monopolistically competitive output. A combination of competition policy along with a money-supply policy, (reducing the reliance of government on tax finance), can moderate the increased market concentration prompted by taxation.