Rand journal of economics vol:33 issue:2 pages:275-297
The existing tax policies toward gasoline and diesel cars in European countries provide a unique opportunity to analyze quality-based price discrimination and the implied tax incidence. In my econometric framework, consumers choose the type of engine based on their annual mileage; prices are set by the manufacturers. The relative Pricing of gasoline and diesel cars appears to be consistent with monopolistic price discrimination, effectively segmenting low-mileage from high-mileage consumers, On average, about 75% to 90% of the price differentials between gasoline and diesel cars can be explained by markup differences. I draw implications for the effectiveness and the revenue effects of tax policy.