Brown Bag Seminar Industrial Economics

We examine how competition affects VAT pass-through in isolated oligopolistic markets as defined by the Greek islands. Using daily gasoline prices and a difference-in-differences methodology, we study how changes in VAT rates are passed through to consumers in islands with different number of retailers. We show that pass-through increases with competition, going from 50% in monopoly to around 80% in more competitive markets but remains incomplete. In addition, we find that there is a positive correlation between competition and the speed of price adjustment. Finally, we find higher pass-through for products with more inelastic demand.