Abstract:

Andrea Galeotti, Benjamin Golub, Sanjeev Goyal,  Eduard Talamas, Omer Tamuz

Suppliers of differentiated goods make simultaneous pricing decisions, which are strategically linked. We study how changes in costs, e.g. caused by taxation, change prices and welfare. A key tool is a certain basis for the goods space, determined by the network of interactions among suppliers. It consists of eigenbundles - orthogonal in the sense that a tax on any eigenbundle passes through only to its own price - with pass-through coefficients determined by associated eigenvalues. Our basis permits a simple characterization of optimal tax-and-subsidy interventions. The Pigouvian leverage of the system - the gain in welfare achievable by an optimal tax scheme - depends only on the eigenvalues of the matrix of strategic interactions according to simple formulas, with more dispersed eigenvalues meaning more leverage. We interpret these results in terms of the network structure of the market.

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