The economics of who bears what types of taxes is complex, confusing, and sometimes controversial. The effects depend on the sensitivity of supply and demand in both the market for the goods and services that companies provide and in the markets for the goods and services that they purchase. Many people find this result counter-intuitive. This short article attempts to set aside the complications of tax incidence analysis to focus on how and why the degree of competition affects who pays taxes.
Firms facing substantial competition have little room to change prices.
At the same time, if such a firm tried to lower its price, then it would lose money in the long-run and go out of business. Therefore cost determines the level of prices in competitive markets. Firms facing less competition can earn above-market rates of return as their prices exceed costs. Such firms have some flexibility in where to set price, but they presumably set them in order to maximize profits. If they set price too high, the quantity demanded will fall too much as consumers purchase less.