Strategic Pricing and Health Price Policies
AbstractBecause 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).
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Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 671.
Date of creation: Apr 2011
Date of revision: Jul 2012
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excise tax; ad valorem tax; tax incidence; strategic pricing; differentiated products; soft drinks.;
Find related papers by JEL classification:
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
- I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-05-14 (Agricultural Economics)
- NEP-ALL-2011-05-14 (All new papers)
- NEP-COM-2011-05-14 (Industrial Competition)
- NEP-MKT-2011-05-14 (Marketing)
- NEP-PUB-2011-05-14 (Public Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Vertical relationships between manufacturers and retailers: inference with limited data,"
Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series
qt6gz1t778, Department of Agricultural & Resource Economics, UC Berkeley.
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