**6.2. Commercial liberalization and changing demand elasticity**

Criticism of Ramsey taxes, which will be applied within the scope of the inverse elasticity rule because luxury goods have high demand elasticity and necessity goods have low demand elasticity, because of its elasticity assumptions may change as part of competition, which is the main abettor of market economy today. Total revenue and demand elasticity for products are important variables in providing profit maximization, which is the principal purpose of firms competing in market economy.

Firms can increase their total revenues by decreasing the demand elasticity for their products. In this context, firms aim to decrease the vulnerability of the products they produce against price changes. Thus, they can increase their total revenues by raising product prices [24]. Yet, together with the increased competition, efficiencies [25, 26] increase, and together with liberalization, market size [27] increases.

According to Palumbo and Herbig [36], brand loyalty, which has different definitions in literature, is in the most general sense a situation, in which consumers continuously tend to seek and purchase only a certain brand even when competitor businesses offer lower prices and

Optimal Taxation of Consumption in the Scope of Changing Elasticities of Demand...

http://dx.doi.org/10.5772/intechopen.74378

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Brand loyalty to be also high in high-priced products [37] leads the consumer, whose brand loyalty increased, to be less sensitive to price changes. Firms, with a purpose of increasing market share and profitability, try to reduce the vulnerability of their products against substitution opportunities and price changes by raising loyalty to their brands. Within this framework, a close relationship between market share and purchase possibilities of brand loyal

Brand loyalty provides some advantages to firms against competition. These advantages can

• Creating brand loyalty decreases an important amount of advertising and promotion costs [39]. Together with the fall in costs, consumers loyal to brand will be loyal to the brand and not be sensitive to price changes as long as they resolve problems they experience about

• Brand loyalty ensures competitive advantage to businesses. It builds a large entrance barrier to new entrant businesses. These barriers lower price elasticity of demand by compli-

• Brand loyal consumers do not oppose to pay a higher price for the products and services the business offers, and this increases the profitability of the business in short and long term. • They do not abandon the brand immediately after they experience a negative situation

All these advantages enabled by brand loyalty on the other hand serve price elasticity of

Brand loyalty with regard to Ramsey taxation has importance especially in terms of decreasing price elasticity of demand for luxury goods. Brand loyalty to be high especially in luxury goods [40] drops price elasticity of demand to the so-called goods by weakening substitution possibilities and thus weakens the sensitivity of consumers of luxury goods the price changes

All these macrovariables and microvariables change price elasticity of demand for luxury and necessity goods as part of differential tax rates in optimal commodity taxes. Additionally, they give way to Ramsey's inverse elasticity rule to be re-evaluated as part of criticisms it receives about income distribution. At this point, price elasticity of demand for luxury and necessity goods rises depending on short and long term effect, commercial liberalization, and

Thus, demand elasticity of necessity goods, which have a large share in the consumption spending of lower level income groups, increases as part inverse elasticity rule; and therefore, tax rates decrease in line with the increase in elasticity. A decline in the tax rate, which the lower income level group will be exposed to as part of inverse elasticity rule, may create a

increased competition and innovation, which are all macroeconomic variables.

consumers, who do not respond to price changes, is in question [38].

cating substitution of products firms produce.

sales promotions.

be listed as follows:

the product.

about the brand.

of these goods.

demand for the product to fall.

more agreeable result in income distribution.

Especially, liberalization in commerce influences export and import performances of industries, declines in tariffs cause scale increases [28], and thus, competition escalates [29]. As supported by quite a few studies, high protectionism in commerce leads firms to produce under optimal scale, and output increases to be negatively affected [30].

Commercial liberalization on the other hand allows the tariff structure to soften, large-scale firms to rise together with the increase in competition, and output levels of small-scale firms to rise [29]. Diversity increased in the market structure that grew by this means enhances the substitution opportunity between goods and thereby increases price elasticity of demand. By this way, the scale that increased through liberalization and competition raises diversity of goods and services and therefore their substitutability and serves for the increase of price elasticity of demand of all necessity and luxury goods.
