The Determinants of an Econometric Demand Model for Beverages

Purpose: The study attempts to explore the determinants of demand for alcoholic and other beverages to see how a rise in prices of alcohol and other beverages and in household expenditure would influence demand. From the results, we discuss the effectiveness of a prospective excise tax increase on demand for alcoholic and other beverages. Design/Methodology/Approach: We use the Almost Ideal Demand System to analyze the demand for alcoholic and other beverages. A two-stage estimation approach is employed to estimate the model with data from Vietnam Households Living Standard survey in 2016. In the first stage, we model the choice of consuming or not consuming by a probit regression model. In the second stage, we estimate the demand system by seemingly unrelated regression (SUR). Findings: We find that demand for beer, other alcoholic beverages, and non-alcoholic packed drinks is elastic to own-price. However, as demand for beer and non-alcoholic packed drinks is also elastic to income, consumption would rise as income grows. Practical implications: Our findings have significant implications for policymakers and beverage producers. The findings suggest that an increase in excise tax would be an effective solution to control demand for alcoholic beverages. Beverage producers could also use the results to design pricing strategies and forecast consumer behaviors. Originality/Value: We contribute new findings to the literature of beverage demand analyses. Our findings differ from those in previous studies in the context of both developed and developing countries, which show that demand for alcoholic beverages is inelastic to own-prices. The findings have important implications for policymakers and beverage producers.