Tax incidence with strategic firms on the soft drink market

Céline Bonnet and Vincent Réquillart

No 11-233, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: 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.

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 (search for similar items in EconPapers)
Date: 2011-04, Revised 2012-07
New Economics Papers: this item is included in nep-agr, nep-com, nep-hea, nep-mkt and nep-pub
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http://www.tse-fr.eu/sites/default/files/medias/doc/wp/fff/11-233.pdf Old version April 2011 (application/pdf)
http://www.tse-fr.eu/sites/default/files/medias/doc/by/requillart/wp_tse_233.pdf Last version July 2012 (application/pdf)

Related works:
Journal Article: Tax incidence with strategic firms in the soft drink market (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:24382

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