Tax incidence with strategic firms in the soft drink market

Abstract

Because soft drink (SD) consumption is considered to be a contributor to the 'epidemic' of obesity, there is a growing interest in evaluating the impact on SD consumption of alternative tax policies. In this paper, we propose a methodology to evaluate the impact of taxation of a food market taking into account the strategic price response of both manufacturers and retailers. We apply this methodology to the French SD market and simulate the impacts of ad valorem and excise taxes. 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 the sugar content of SD 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. In the short term, that is ignoring positive long term health effects, a € 9 cents per litre excise tax has a small negative welfare effect (about € 1 per person per year).

Taxing sugar-sweetened beverages: impact on overweight and obesity in Germany

“…Theoretically and assuming a fully competitive market, this pass-on rate should be 100%, which we modelled in our base-case. However, many markets (the beverage market being one of them) are not fully competitive, with increased costs (as a result of the tax) being possibly absorbed by the manufacturer or even over-shifted to consumers [12, 24–28]. We therefore modelled an 80% pass-on rate in a sensitivity analysis.…”

Mandatory labels, taxes and market forces: An empirical evaluation of fat policies

“…Firms are likely to adjust to exogenous shocks, and ignoring their strategic behaviour may lead to biased estimates of the effect of public policies (Griffith et al, 2010;Bonnet and Réquillart, 2013). The simulation of the effects of policy shocks on the market equilibrium therefore requires a structural model of the supply side.…”

“…We apply a three-steps structural econometric strategy that has been recently used by Bonnet and Réquillart (2013) to analyse softdrink taxes. In a first step, we use scanner data, disaggregated at both the household and product levels, to estimate a discrete choice model of demand allowing for substitutions both between varieties of fromages blancs or dessert yogurts and towards an outside option.…”

Do High Consumers of Sugar‐Sweetened Beverages Respond Differently to Price Changes? A Finite Mixture IV‐Tobit Approach

“…This literature shows that taxing high‐sugar‐content products would result in substitutions towards diet products. It would also produce substitutions to other foods and beverages, but there would still be a reduction in total calorie intake (Bonnet and Requillart, ; Finkelstein et al , ; Zhen et al , ).…”

“… This is not a crucial assumption, as the pass‐through rate can easily be varied in simulations. The strategic price reactions of producers have been investigated by Bonnet & Requillart () using a structural econometric IO model of the French soft‐drink market. They find that firms would pass to consumers between 60% and 90% of an ad‐valorem tax increase, and between 110% and 130% of an excise tax.…”