Oz Shy
Working Paper 2024-5a
June 2024 (Revised May 2025)
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
https://doi.org/10.29338/wp2024-05
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Please address questions regarding content to Oz Shy, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309.
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