Quality-based Price Discrimination and Tax Incidence | Evidence from Gasoline and Diesel Cars

The existing tax policies towards gasoline and diesel cars in European countries provide a unique opportunity to analyze quality-based price discrimination and the implied tax incidence. We develop an econometric framework for the demand and pricing of gasoline and diesel cars. Consumers choose the type of engine based on their annual mileage; prices are set by the manufacturers. Our empirical results show that the relative pricing of gasoline and diesel cars is consistent with price discrimination of a monopolistic type, e®ectively segmenting low mileage from high mileage consumers. On average, about 75 to 90 percent of the price di®erentials between gasoline and diesel cars can be explained by markup di®erences. The implied tax incidence is especially based on fuel taxes and less so on annual car taxes. Implications for the e®ectiveness and the revenue e®ects of tax policy are drawn. ¤Catholic University of Leuven and C.E.P.R. (London). I am grateful to Hans Degryse, Bertrand Melenberg, Wilfried Pauwels, and especially to two anonymous referees and Ariel Pakes for helpful comments. Research assistance in data collection was provided by Alexey Novoseltsev and Sandy Torrekens. Financial support by the Science Foundation { Flanders (Fonds voor Wetenschappelijk Onderzoek { Vlaanderen, Grant 774810/8/F01/6260/131200) is gratefully acknowledged.