On Taxation Policy in Bilateral Oligopoly: A Review

ABSTRACT This paper provides a comprehensive review of the literature on taxation policy within the framework of strategic market games (SMG). We refer to a simple prototype of SMGs called bilateral oligopoly models. The review reveals that the effects and effectiveness of redistributive tax policies depend on individuals' preferences and strategic behavior in trade. Central to this analysis is the influence of strategic interactions on the price formation mechanism and, therefore, on the optimality of tax and transfer policies for improving allocation efficiency. We connect our findings to broader discussions on tax incidence and optimal taxation in environments characterized by market imperfections, market power, and strategic interactions. Although we consider different fiscal instruments, this review points to a common underlying mechanism: the incidence and optimality of taxation depend on key factors such as preferences and the design of tax instruments. In this sense, this survey highlights the complementarity of a diverse and growing literature.