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Media Firm Strategy And Advertising Taxes

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Executive Summary

Empirical evidence suggests that people dislike ads in TV programs and other media products. In such situations standard economic theory prescribes that the advertising volume can be optimally reduced by levying a tax on ads. However, making use of recent advances in the theory of firm behavior in two-sided markets, the authors show that taxation of ads may be counterproductive. In particular, they identify a number of situations in which ad-adverse consumers are negatively affected by the tax, and they even show that the tax may lead to higher ad volumes. This unorthodox reaction to a tax may arise when consumers significantly dislike ads, i.e. in situations where traditional arguments for corrective taxes are strongest.

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