Income effects and the welfare consequences of tax in differentiated product oligopoly

Random utility models are widely used to study consumer choice. The vast
majority of applications assume utility is linear in consumption of the outside
good, which imposes that total expenditure on the subset of goods of interest
does not affect demand for inside goods and restricts demand curvature and passthrough.
We show that relaxing these restrictions can be important, particularly
if one is interested in the distributional effects of a policy change, even in a
market for a small budget share product category. We consider the use of tax
policy to lower fat consumption and show that a specific (per unit) tax results
in larger reductions than an ad valorem tax, but at greater cost to consumers.