Céline Bonnet, and Vincent Réquillart, “Tax incidence with strategic firms on the soft drink market”, TSE Working Paper, n. 11-233, April 2011, revised July 2012.
Healthier food diet is likely to prevent numerous non communicable diseases. Then there is a growing interest in evaluating the impact of food price taxation on food consumption. However, strategic reactions of both manufacturers and retailers are missing in empirical analysis. Rather, passive pricing is assumed. We develop a structural econometric model, to analyze vertical relationships between the food industry and the retail industry. We apply this model to the beverage industry and consider taxation of sugar. After selecting the ’best’ model of vertical relationships, we simulate different taxation scenarios. We consider excise tax as well as ad valorem tax. We find that firms behave differently when facing an ad valorem tax or an excise tax. Excise tax is overshifted to consumer prices while ad valorem tax is undershifted to consumer prices. We find that an excise tax based on sugar content is the most efficient at reducing soft drink consumption. Our results also indicate that ignoring strategic pricing by firms leads to misestimate the impact of taxation by 15% to 40% depending on the products and the tax implemented.
excise tax; ad valorem tax; tax incidence; strategic pricing; differentiated products; soft drinks
- H32: Firm
- L13: Oligopoly and Other Imperfect Markets
- I18: Government Policy • Regulation • Public Health