The impact of soda taxes on consumer welfare: implications of storability and taste heterogeneity

Abstract

The typical analysis on the effectiveness of soda taxes relies on price elasticity estimates from static demand models, which ignores consumers' inventory behaviors and their persistent tastes. This article provides estimates of the relevant price elasticities based on a dynamic demand model that better addresses potential intertemporal substitution and unobservable persistent heterogeneous tastes. It finds that static analyses overestimate the long‐run own‐price elasticity of regular soda by 60.8%, leading to overestimated consumption reduction of sugar‐sweetened soft drinks by up to 57.9% in some cases. Results indicate that soda taxes will raise revenue but are unlikely to substantially impact soda consumption.

Consumer Inventory and Demand for Storable Goods: New Evidence from a Consumer Survey

“…Wang () shows that overestimation of demand elasticity may produce misleading results for government policy. The United States government implemented soda taxes to reduce the intake of sugar‐sweetened beverages, and, thus, obesity.…”

“…In addition, the authors show that a static demand model overestimates the substitution with the no-purchase option by as much as 200%. Wang (2015) shows that overestimation of demand elasticity may produce misleading results for government policy. The United States government implemented soda taxes to reduce the intake of sugar-sweetened beverages, and, thus, obesity.…”

Identification and Estimation of Forward-Looking Behavior: The Case of Consumer Stockpiling

“…Consumer stockpiling behavior of packaged goods has been widely studied in both the empirical marketing (Erdem, Imai, and Keane (2003), Sun (2005), Chan, Narasimhan, and Zhang (2008), Seiler (2013), Liu and Balachander (2014), Haviv (2014), Osborne (2018b)) and empirical industrial organization literatures (Pesendorfer (2002), Hendel and Nevo (2006), Hendel and Nevo (2013), Wang (2015), Pires (2016), Osborne (2018a)). Prices often follow a "hi-lo" pattern where they take on a low promotional value for one or two weeks, and return to a higher regular retail price for a longer period of time.…”

“…Understanding demand responses to changes in the price process is of critical importance to retail managers who wish to optimally allocate limited promotional budgets. In the empirical industrial organization literature, structural models have been used to understand the impact of stockpiling on merger analysis (Hendel and Nevo 2006), food taxation (Wang 2015), and price index construction (Osborne 2018a).…”

Obesity and Self Control: Evidence from Food Purchase Data

“…On some level, this may serve to justify the multitude of sin taxes that have been proposed across the world. Early evidence on the effectiveness of these policies are mixed, with some showing a lack of decreased consumption of junk foods such as soda (Wang 2015;Wang et al 2017) and some showing limited decreased consumption (Taylor et al 2016;Debnam 2017). Sin taxes are by no means the only policy tool available or explored.…”