In this paper we analyze a simple environmental tax in Edgeworth-Bertrand duopoly with soft capacity constraints and argue that the mode of strategic interaction is co-determined by taxation. Although the capacity constraint gives rise to a non-convexity it is possible to find efficient taxes....

We analyze unit and ad valorem taxes in Edgeworth-Bertrand duopoly. In Edgeworth-Bertrand duopoly the mode of competition is endogenous through firms' choice of capacity (Maggi, 1996). We show how commodity taxes co-determine capacity and thus competition intensity. In particular, we argue that...