Information and heterogeneous tax pass-through: An application to retail fuel markets

Abstract

In the presence of information frictions, different consumer types face different price distributions depending on their access to information, and thus possibly also different effective pass-through rates. We estimate a model of consumer search using data from German retail fuel market. We find that search costs are lower in relatively rich areas and decrease over time. Uninformed consumers face higher effective pass-through rates. Given recent increases in commodity prices, this has important distributional implications for regulatory and tax policy responses. Decreasing the VAT rate by 16% leads a 2.3% decrease in transaction prices, but dis-proportionally benefits consumers in areas with high GDP per capita.