Imperfect Competition and the Shifting of Output and Input Taxes in Vertically-Related Markets

We consider the impact of output and input taxes in vertically-related markets where the downstream industry is oligopolistic and the upstream sector competitive. We show that the shifting of a tax in each related market will depend on the degree of market power in the downstream market, the characteristics of the demand function, the nature of the production technology characterising the downstream industry cost function and the existence of increasing or decreasing returns to scale. Only in specific circumstances will the forward-shifting of an input tax be observationally equivalent to the backward-shifting of an output tax.