Is Sales Tax Included in the Price? How Consumer Inattention Affects Prices
June 18, 2024
Summary
Sales tax is generally not included in advertised prices in the United States, whereas other countries embed value added taxes into prices. This working paper investigates how the different pricing structures and consumers' decision-making process affect the intensity of price competition.
View PaperWorking Paper 2024-5a
Abstract: Sales tax is generally not included in the advertised price quoted to consumers in the United States. In contrast, value added taxes (VAT) are embedded into the price in most other countries. This article investigates how the two different pricing structures and consumers’ decision-making process affect the intensity of price competition. The two pricing structures yield identical market outcomes with fast-computing consumers who are able to compute the exact sales tax each time they compare prices of different sellers and different brands. With slow-computing consumers, prices and profits are higher when sellers quote and compete in prices without sales tax.
JEL classification: D43, H29, L13, M3
Key words: price competition, price comparisons, sales tax, value added tax, fast and slow-computing consumers, mental accounting, inattention, consumer decision making
Digital Object Identifier (DOI): https://doi.org/10.29338/wp2024-05
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