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Strategic Pricing and Health Price Policies

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  • Bonnet, Céline
  • Réquillart, Vincent

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. 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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File URL: http://idei.fr/doc/wp/2011/strategic_pricing.pdf
File Function: Old version April 2011
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File URL: http://idei.fr/doc/by/requillart/JPUBE_Revised.pdf
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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 671.

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Date of creation: Apr 2011
Date of revision: Jul 2012
Handle: RePEc:ide:wpaper:24074

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Related research

Keywords: excise tax; ad valorem tax; tax incidence; strategic pricing; differentiated products; soft drinks.;

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References

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  1. Villas-Boas, Sofia B., 2007. "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.
  2. Bergès-Sennou Fabian & Bontems Philippe & Réquillart Vincent, 2004. "Economics of Private Labels: A Survey of Literature," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 2(1), pages 1-25, February.
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Cited by:
  1. Olivier Allais; & Fabrice Etile; & Sebastien Lecocq, 2012. "Mandatory labelling, nutritional taxes and market forces: An empirical evaluation of fat policies in the French fromage blanc and yogurt market," Health, Econometrics and Data Group (HEDG) Working Papers 12/14, HEDG, c/o Department of Economics, University of York.
  2. Olivier Allais & Fabrice Etilé & Sébastien Lecocq, 2012. "Mandatory labels, taxes and market forces: An empirical evaluation of fat policies," PSE Working Papers halshs-00736556, HAL.

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