Tax incidence with strategic firms in the soft drink market

Céline Bonnet and Vincent Réquillart

Journal of Public Economics, 2013, vol. 106, issue C, 77-88

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. An excise tax is overshifted to consumer prices while an ad valorem tax is undershifted to consumer prices. We find that an excise tax based on the sugar content of SD is the most effective at reducing SD consumption. Our results also indicate that ignoring strategic pricing by firms leads to misestimations of the impact of taxation by between 15% and 40% depending on the products and the tax implemented. In the short-term, that is, ignoring positive long-term health effects, a €9cents/l excise tax has a small negative welfare effect (about €1/person/year).

Keywords: Excise tax; Ad valorem tax; Tax incidence; Strategic pricing; Differentiated products; Soft drinks (search for similar items in EconPapers)
JEL-codes: H32 I18 L13 Q18 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (86)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:106:y:2013:i:c:p:77-88

DOI: 10.1016/j.jpubeco.2013.06.010

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