Tax Responses in Platform Industries

Two-sided platform \u85rms serve distinct customer groups that are connected through interdependent demand, and include major busi-nesses such as the media industry, banking, and the software industry. A well known result of tax incidence is that consumers of a more heavily taxed good pay a higher price and thus buy less of the good. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad valorem tax may lower end-user prices and spur sales. Thus, two-sided platform \u85rms may not at all en-gage in tax shifting via price increases. We further show that a higher ad valorem tax may undermine a \u85rms incentive to di¤erentiate its product from that of its competitors. Finally, we demonstrate that the e¤ects of increasing speci\u85c taxes may be the opposite of those of increasing value added taxes