Taxation and Durable-Goods Monopoly: Does a Current Tax Influence Firm Behavior?

A simple two-period linear demand durable-goods monopoly model is analyzed where the firm faces an ad-valorem tax. Unlike previous models, the impact of an expected future tax is not analyzed; rather it is assumed the tax only is levied in the first (current) period. The model shows that such a current tax can dramatically impact the monopolist¡¯s behavior. For example, the analysis reveals that, as long as the product is durable, the firm wishes to concurrently rent and sell in period one if it faces a current ad-valorem tax. This indicates that the current tax policy on durables, separate from any expected future tax, likely also has a strong impact in imperfectly competitive durable-goods markets.