Reference no: EM133131163

You are a major clothing retailer located in Texas, a state which currently does not tax clothing. The state estimates that not taxing clothing costs them $300 million a year in lost tax revenue, so it has been considering making clothing taxable. Some retailers oppose this, saying that up to one third of their sales are from tourists from other states visiting to take advantage of the tax exemption. Suppose Minnesota adds a 7% sales tax on all clothing. The tax is collected by your store, but it is a tax levied on the consumer: the price the consumer pays rises to 7% more than the price tag on the clothing. Assume consumers consider this additional 7% tax and factor it into their purchasing decision, thereby reducing the amount they are willing to pay for the clothing itself by approximately 7%.

1. In market segments that are similar to perfect competition (socks, for example), how would this affect your pricing? Explain your options and determine the best approach here given the nature of the market segment.
2. What would you expect to happen to the number of clothing retailers and, if anything, to the size of these retailers? Explain.