Effects of ad-valorem taxes on location decision under free entry Cournot oligopoly

This paper examines the impact of the ad-valorem commodity tax as a policy device on the location decision of undifferentiated oligopolistic firms with free entry. It shows that: (1) When the distance between the plant location and the output market is held constant, the optimum location for the oligopolistic firm would be independent of the ad-valorem tax if the production function is homothetic, and (2) when the distance between the plant location and the output market is a decision variable, the optimum location for the oligopolistic firm will move closer to the output market if the demand function is linear or concave. These results are significantly different from the conventional results based on the monopolistic location model. It indicates that the effect of an ad-valorem tax on the location decision of oligopolistic firms crucially depend upon the shape of market demand function.