Commodity taxation principle, heterogeneous goods, and endogenous choice between price and quantity contracts

Abstract

In the context of firms’ endogenous choice between price and quantity contracts, we show that when firms choose different strategic variables under the destination principle, the government of the quantity-oriented firm imposes a negative commodity tax rate. However, the government of the price-oriented firm imposes a positive commodity tax rate when either (1) the product homogeneity is high enough or (2) the product homogeneity is below a critical level and trade costs are sufficiently low. Under the origin principle, the government of the price-oriented firm provides a higher subsidy than that of the quantity-oriented firm. Regarding the government’s decision on the commodity taxation principle, the origin principle may result in Cournot or Bertrand competition, as well as a mixed strategy Cournot–Bertrand competition, as opposed to the destination principle, which only allows for Cournot competition. In the spirit of economic integration, the origin principle dominates the destination principle.