|
VAT as paid |
VAT value at Year 2 |
Firm A |
$4.00 | $4.40 |
Firm B |
$5.40 | $5.40 |
Firm C |
$9.40 | $9.40 |
The vertically integrated Firm C enjoys a tax advantage of 40 cents per unit, relative to its non-integrated competitors A and B considered together. ($4.40 + $5.40 - $9.40 = $.40.) Clearly, we can expect firms such as A and B to consolidate in the face of the new tax in order to eliminate this competitive disadvantage.
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