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Abstract

We analytically study the pricing strategies a food retailer can execute under taxation when there is adverse selection. The questions are: how does the implementation of a tax regime affect the seller's ability to screen the market, and what effects do taxes have on package sizes and welfare distribution. We develop a parsimonious screening model in which the retailer offers a divisible good and does not know the buyers' willingness to pay. Under the more likely marketing strate- gies, we find that only consumers with high willingness to pay for the food see a reduction in their welfare; all package sizes are smaller, and the retailer sees her expected profit unambiguously diminished. These general results hold regardless of the type of implemented tax. Additionally, we briefly discuss how changes in ad valorem and specific taxes impact final prices.

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