Market in economics describes a transaction relation between buyers and sellers of a particular good or service. In an unregulated market, the independent decision of buyer and seller lead to an efficient market outcome. Government intervention in market interrupts efficient functioning of market. Imposition of tax is one form of intervention that distorts market outcome resulting in an inefficiency in resource allocation (Hill and Schiller 2015).
This section provides a summary of a recently published article discussing the consequences of a tax on online shopping in Australia. The article titled “Turnbull online shopping tax punishes Aussie consumers: How to avoid the Amazon rip off” has highlighted the step taken by online retailer Amazon.com in retaliation to proposed tax. The recent changes of GST laws which states the overseas seller to collect a tax for all the products sold under $1000 is responsible for the increase in tax burden (Frank 2018). In an attempt to escape from the proposed tax, the online retailer will take an attempt to shift its Australian clients to its local website instead of using the international one. The local website of Amazon featured with a smaller and an expensive items compared to is global site.
The step taken by Amazon however is contested by people belonging to different sector. Scott Morrison, the Treasures of Australia criticized this step of the company by stating that Australians will not be much affected from this step as they have other available alternative choices. The proposed tax is expected to generate a revenue of $300 million. The raised fund can be used to finance development activities such and health and education spending. Amazon faces a different structure of VAT in different nations. Therefore, redirecting customers to the local website is a commercial decision of the company. Customer of Amazon at the launching of website opined at products are already charged a higher price in the local website (news.com.au 2018). It is better for them to order the same item from US website and get the product with paying the shipping fees. After tax, the situation will turn harder as products will be more expensive after taxation.
The other online stores like Nordstrom, ASOS or Macy may follow the path of Amazon of blocking Australian customers from their global website. This is an obvious consequence of the proposed online sopping tax. With more and more online seller join Amazon it would become more difficult for Australian to have access to wide variety of products. This would create a pressure on local retailers to meet the demand of local people. Instead of raising efficiency as that was expected before implementing the tax, the tax in turn resulted in intense lobbying of large retailers.
The figure below shows effect of a tax in market using a framework of demand and supply.
Figure 1: Market equilibrium and effect of tax
Imposition of tax in a market economy affects behavior of buyers and sellers. The online tax though is imposed on online sellers but it affects the Australian buyers as well. The article claims that the imposed online tax actually punishes Australian buyers. This claim is true. The imposition of tax punishes Australian buyers in two ways. Firstly, the higher price after tax imposition reduces affordability of buyers and restrict buyers. Secondly, blocking of Australian customers by Amazon and other online retailers to the global online platform restrict their access to a larger variety of products (Stoneman, Bartoloni and Baussola 2018). The claim can be justified with application of relevant economic theories. The figure below shows the impact of a sales tax on market outcome.
Figure 2: Impact of online shopping tax
(Source: as created by Author)
Impact of an indirect tax can be evaluated taking assistance of the above figure. The effect of tax on buyers and sellers of online market is explained in terms of relevant demand and supply. In figure 2, the demand curve in the online shopping market is explained as D1D1. The relevant supply curve is S1S1. Given the market demand and market supply curve equilibrium is attained corresponding to the point E1. Now, consider effect off government intervention in the form of an online tax (Cowen and Tabarrok 2015). Previously taxes were charged on goods prices over $1000. However, amendments are made in the GST laws which now require tax payment below $1000. The obligation of tax directly affects the suppliers (homeaffairs.gov.au 2018). As suppliers now need to pay a significant portion for tax payment, their profitability reduces. This leads to a contraction of supply specified by the leftward shift of the supply curve. The new supply curve is given as S2S2. With tax, market equilibrium occurs at E2. The equilibrium price now increases to P11, this is the price that buyers pay. This price however is not received by sellers. Price received by the seller is given as P12. The difference in the price is the tax paid to the government (Sawyer 2018). At the acquired equilibrium position, equilibrium quantity in the market falls to Q2. The decline in equilibrium quantity shows how taxes reduce equilibrium quantity in the market and hence, punishes customers from a lower available choice.
In context of shopping tax in Australia, the new tax structure adversely affects buyers of Australia. The attempt of Amazon to block Australian customers restricts access to customers to the wide international market. Not only Amazon but also other online retailers might also follow the same strategy. The reduced access to international market reduces available choice to Australian buyers. The restricted competition from the international market puts domestic retailers at an advantageous position. They can now charge a higher price to the Australian buyers. Buyers in Australia are thus at a disadvantageous position in relation to buyers worldwide and have limited choice available at a higher price.
The virtual medium of shopping has changed the way of shopping or sell products bringing several advantages for both buyers and sellers. Following the primary benefits of transacting products online.
Convenience
The online platform increases the flexibility to shop. Buyers can shop anytime from anywhere. They do not need to wait for the shops to open. They can easily shop avoiding the crowd and without any time restriction. It allows customers to optimize their time for shopping with the reward of no pollution.
Better prices
The biggest advantage of online shopping is products are offered at the best prices. As products are delivered directly to end users without intervention of middle man, sellers are able to offer good at a relatively cheaper price (Zheng, Lee and Cheung 2017). Buyers are also in a position to compare price and other feature of similar products among the available alternatives and choose the best deal for them.
Wide market for products and services
The internet and online shopping market has brought a long standing change in businesses. Such changes result in a greater competitive advantage especially for small and medium sized enterprises. One obvious benefit is the opening up of new online markets that are easily accessible and connected through internet (Wu et al. 2014).
Greater variety
In different e-commerce sites, buyers are able to get variety of products belong to different brands in one place. There are far greater variety of goods available at local stores.
Efficiency of online shopping market
Efficiency in resource allocation in the market economy is defined in terms of productive and allocative efficiency. Productive efficiency is attained when firms produce output corresponds to the minimum point of average total cost. Market achieves allocative efficiency of marginal benefit associated with a particular good or service is equivalent to the marginal cost of producing the goods (Mahnke, Benlian and Hess 2015). As the marginal benefit is reflected from willingness to pay for the good or price. The allocative efficiency thus requires price to be equal to the marginal cost of production.
There are different channels through which ecommerce market leads to a more efficient allocation of resources. Firstly, introduction of online platform of shopping increase competition by allowing international national to compete with domestic retailers. The increased competition prevents sellers to charge price above the marginal cost (Li, Wen and Sun 2018). If one seller increases prices, then buyers can shift their demand to other available substitutes. Increase in competition thus ensures that buyers are served with best possible price resulting in allocative efficiency.
Figure 3: Economic efficiency from increased competition
(Cowen and Tabarrok 2015)
Opening up of online shopping market helps to increase customer base of the producers. This benefits the buyers and sellers group. The sellers do not face the problem of excess supply because of a broader client base. Buyers on the other hand never face the problem of supply shortage as supply comes from numerous sellers all around the world (Bilgihan, Kandampully and Zhang 2016). The market thus always remains at equilibrium position.
The lesser number of middle man on the online shopping platform ensures efficient distribution of goods and services. The greater transparency in exchange and lesser intervention reduces the possibility of dead-weight loss or efficiency loss.
The discussion in the previous sections clearly indicates that imposition tax on online shopping platform induces online retailers like Amazon to shift their focus from Australian market. Their purpose is to avoid taxation. As Australian customers gets blocked from international websites and redirects to local websites they are stuck in a situation of higher price and limited choice. This tends to increase the demand from domestic retailers. It was expected that the imposed tax by restricting international competition will benefit the domestic retailers and increase their competitive efficiency (Badhe and Bambawale 2017). High demand tends to increase price which in turn increases profitability. Being lured by the higher profitability Australian retailers were expected to focus on improving their efficiency. The reality however is different from that actually expected. Instead of improving efficiency, it was observed that a large share of market dominated by big retailers tend to capitulate the market. The major retailers in Australian involve in intense lobbying to keep price of their product to a significantly a higher level. Their products are available in the overseas market with a high price tag. One factor explaining the charged higher price by Australian retailers is the increasing pressure of cost. The zoning laws, high cost of labor, red tape and a relatively high electricity cost all adds to increase the cost burden. The recover the cost the retailers have to charge a higher price to continue production. The tax thus fails to bring any competitive efficiency for Australian retailers.
Tax by changing the equilibrium price and quantity in the market had a significant influence in terms of resulted total surplus. Total surplus in the economy represents surplus enjoyed by both consumer and producer. Consumer surplus is the surplus to consumer resulted from difference in price between consumers are willing to pay and actual market price. Producer surplus is the surplus to producers arises from the difference between minimum supply price and equilibrium market price (Sloman and Jones 2017). As the imposed tax leads to change in both the price paid by buyers and that received by sellers, surplus received by both group changes resulting a change in total surplus. There is an additional component called dead-weight loss explained in figure 4.
Figure 4: Change in economic surplus after tax
(Source: as created by Author)
Without tax, market equilibrium is attained at E1. Associated to the equilibrium, market price is P1. At this price, the surplus to consumers are given by the area of the triangle E1P1D1. The surplus to producers at this price equals E1P1S1. Total surplus is E1P1D1 + E1P1S1.
After the imposition of tax consumers pay a higher price at P11. The high price reduces surplus to consumer. The consumer surplus now given by area of the smaller triangle E2P11D1. Buyers though pay a high price but sellers receive a lower price given as P12. Lower price reduces producer surplus to the smaller area indicated as FP12S2. Some of the lost consumer and producer surplus are gone to the government as tax revenue (McKenzie and Lee 2016). This is shown by the rectangular area E2P11P12F. From the tax society suffers a dead-weight loss indicated by the triangular area E1E2F.
Government often attempts to restrict foreign competition to support the domestic producers. Multinational companies operate all around the world. The large scale operation of these companies offer them advantage of low cost production along with providing larger variety (Friedman 2017). This helps them to attract more and more customers causing local retailers to lose their market share. Government implements taxation policy on multinationals to protect the domestic retailers.
The consequence of such taxation policy however differs in the short run and long run. With an increase in price in the international market consumers tend to shift their demand more towards the domestic retailers. This increases demand side pressure in the short run (Stiglitz and Rosen 2015). The producers however cannot increase their supply much because of fixed factor inputs. The higher demand in the short run thus results in a higher price in the short run. Supply and demand both is relatively inelastic in the short run. Neither buyer nor the sellers adjust much to the change in market price in a shorter span. Consequently, there is an upward pressure on price and quantity in the short run (Artemenko et al. 2017).
Figure 5: Impact of taxation policy in the short run
(Source: as created by Author)
In the long run, with a sufficiently long period of time, the domestic sellers can increase their supply by changing combination of factor inputs (Aghion et al. 2015). Buyers on the other hand are able to adjust their demand in response to high price. The increase in supply in the long run expected to reduce the upward pressure on price. The supply curve in the long run thus shifts outward. The long run equilibrium is observed at the intersection point of new supply curve and demand curve (Yang 2018). Consequently, market equilibrium price expected to be lower in longer time horizon with an increase in available quantity.
Figure 6: Impact of taxation policy in the long run
(Source: as created by Author)
Reference list
Aghion, P., Cai, J., Dewatripont, M., Du, L., Harrison, A. and Legros, P., 2015. Industrial policy and competition. American Economic Journal: Macroeconomics, 7(4), pp.1-32.
Artemenko, D.A., Aguzarova, L.A., Aguzarova, F.S. and Porollo, E.V., 2017. Causes of tax risks and ways to reduce them. European Research Studies, 20(3B), p.453.
Badhe, A. and Bambawale, S., 2017. Capturing Retail Demand and using linear regression to influence competitive offers from retailers. Neural Networks & Machine Learning, 1(1), pp.1-1.
Bilgihan, A., Kandampully, J. and Zhang, T., 2016. Towards a unified customer experience in online shopping environments: Antecedents and outcomes. International Journal of Quality and Service Sciences, 8(1), pp.102-119.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan International Higher Education.
Frank, J., 2018. Online shopping in Australia is about to become more expensive. [online] Vogue.com.au. Available at: https://www.vogue.com.au/fashion/news/online-shopping-in-australia-is-about-to-become-more-expensive/news-story/cf0d64aed6cda6734e50a80157af3ba6 [Accessed 2 Sep. 2018].
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Hill, C. and Schiller, B., 2015. The Micro Economy Today. McGraw-Hill Higher Education.
Homeaffairs.gov.au., 2018. Buying over the internet. [online] Available at: https://www.homeaffairs.gov.au/trav/impo/buyi [Accessed 2 Sep. 2018].
Li, Y., Wen, D. and Sun, X., 2018. Quality supervision game between government and online shopping platforms. Total Quality Management & Business Excellence, pp.1-13.
Mahnke, R., Benlian, A. and Hess, T., 2015. A grounded theory of online shopping flow. International Journal of Electronic Commerce, 19(3), pp.54-89.
McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs: The economic way of thinking for managers. Cambridge University Press.
NewsComAu., 2018. ‘Online shopping tax punishes Aussie consumers’. [online] Available at: https://www.news.com.au/finance/business/retail/turnbulls-online-shopping-tax-punishes-aussie-consumers-how-to-avoid-the-amazon-ripoff/news-story/a9fc27c89f4f9c8ad933c34551e463df [Accessed 2 Sep. 2018].
Sawyer, M., 2018. Microeconomics, Mesoeconomics and Macroeconomics. In Alternative Approaches in Macroeconomics (pp. 105-126). Palgrave Macmillan, Cham.
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Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the public sector: Fourth international student edition. WW Norton & Company.
Stoneman, P., Bartoloni, E. and Baussola, M., 2018. The Microeconomics of Product Innovation. Oxford University Press.
Wu, L.Y., Chen, K.Y., Chen, P.Y. and Cheng, S.L., 2014. Perceived value, transaction cost, and repurchase-intention in online shopping: A relational exchange perspective. Journal of Business Research, 67(1), pp.2768-2776.
Yang, H., 2018. Income redistribution and public goods provision under tax competition. Journal of Urban Economics, 104, pp.94-103.
Zheng, X., Lee, M. and Cheung, C.M., 2017. Examining e-loyalty towards online shopping platforms: the role of coupon proneness and value consciousness. Internet Research, 27(3), pp.709-726
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