An optimal internet location strategy for markets with different tax rates

Eric J. Levin, Robert E. Wright

Research output: Chapter in Book/Report/Conference proceedingChapter

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Abstract

The traditional view that a high sales tax rate reduces trade by driving a wedge between the purchase and sale price may not apply to internet commerce for two reasons. The first reason is that the sales tax paid by buyers purchasing via the internet is determined by the tax rate in the region of the buyer. The second reason is that a high sales tax may lower the before-tax price if sellers absorb part of the tax. Taken together, this implies that internet distributors may profitably target customers in regions with low tax rates by locating their selling addresses in high tax regions. Consequently the optimal marketing strategy for a global internet distributor may include siting selling locations in regions with high tax rates in order to target customers in regions with low tax rates. An empirical analysis of the European car market suggests that this is more than a remote theoretical possibility by demonstrating that the before-tax prices recommended by manufacturers for new cars are lower in high tax countries.
Original languageEnglish
Title of host publicationEconomics and the Internet
Subtitle of host publicationProceedings from the Third Berlin Internet Economics Workshop
EditorsThorsten Wichmann
Pages5-9
Number of pages5
Publication statusPublished - 2001

Publication series

NameBerlecon Research documents
PublisherBerlecon

Keywords

  • internet trading
  • tax rate differences
  • automobiles
  • microeconomics

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  • Cite this

    Levin, E. J., & Wright, R. E. (2001). An optimal internet location strategy for markets with different tax rates. In T. Wichmann (Ed.), Economics and the Internet: Proceedings from the Third Berlin Internet Economics Workshop (pp. 5-9). (Berlecon Research documents).