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How to Tax a Monopoly Platform in a Product Differentiation Set-Up?: A Primer Based on Salop's Circular City Model
Abstract
The chapter models a monopoly platform with buyers on one side and sellers on the other. The platform charges some combination of a fixed membership fee and a variable usage fee from both the sides and the buyers are heterogeneous in terms of the per unit benefit they derive on the transaction of the product. In this digital era of IT-based business ecosystems, the big names in the digital business market have been accused of serious tax avoidance in countries where they operate. In this backdrop, the author introduces a baseline monopoly platform model for policy making purposes, incorporating both ad valorem and specific taxes on the buyers' side of the platform alone. But the results can be similarly interpreted for the seller side as well, without any loss of generality. The chapter gives us insights as to whether there is any cross-side externality working in the presence of product differentiation in standard monopoly platform models.
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