nonsense. The 3rd option is to leave his higher price in place while his competitors do the same, so that all enjoy higher margins.
Which requires that businesses can collude with each other and prevent defections, and if they can do that, they can just raise prices arbitrarily at any time regardless of the tax system. All available evidence suggests that they cannot.
Lets say you own a small video rental store and are competing with several Blockbusters, Hollywood Video and other mega chains in your town. Your scratching by but surviving. Will you in an attempt to earn more customers that are currently go to Blockbuster et al...
1) Raise your prices
2) Keep your prices the same
3) Lower your prices
In my town and ALL the surrounding towns around me there is a Home Depot and Lowes right next to eachother. They are constantly battling for market share. And invariably there is always an Ace Hardware just down the street.
Is Ace Hardware going to not lower prices and hope that Home Depot and Lowes don't either? Or are all 3 of them going to lower prices in an attempt to gain market share over the others.
The Invisible Hand is not a myth. It is as real as your hand.
As an every day example look at McDonalds and Burger King. When one comes out with some special offer such as 2 for $2, the other quickly follows suit. McDonalds introduce the Dollar menu a few years back. BK followed and Wendys came out with the 99 cent menu.
It would happen again.
Competition doesn't work that way.