IDEAS home Printed from https://ideas.repec.org/a/aea/aejmic/v12y2020i1p1-41.html

One Markup to Rule Them All: Taxation by Liquor Pricing Regulation

Author

Listed:
  • Eugenio J. Miravete
  • Katja Seim
  • Jeff Thurk

Abstract

Commodity taxation often involves uniform tax rates. We use alcohol laws that tax differentiated spirits with a comprehensive uniform markup to evaluate redistribution generated by such simple tax policy. We document preference heterogeneity among consumers, variation in product demand elasticities, and market power among producers with heterogeneous product portfolios. Relative to more flexible product-level markups recognizing demand heterogeneity and strategic price responses of firms, we find that the uniform markup underprices less elastic spirits, implicitly subsidizing low-income and less educated residents. The uniform markup grants additional market power to small specialized firms whose product positioning benefits from the policy.

Suggested Citation

  • Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2020. "One Markup to Rule Them All: Taxation by Liquor Pricing Regulation," American Economic Journal: Microeconomics, American Economic Association, vol. 12(1), pages 1-41, February.
    • Handle: RePEc:aea:aejmic:v:12:y:2020:i:1:p:1-41
    DOI: 10.1257/mic.20180155
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/mic.20180155
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/mic.20180155.data
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/mic.20180155.appx
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/mic.20180155.ds
    Download Restriction: no
    File URL: https://libkey.io/10.1257/mic.20180155?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Meng, Yang & Brennan, Alan & Purshouse, Robin & Hill-McManus, Daniel & Angus, Colin & Holmes, John & Meier, Petra Sylvia, 2014. "Estimation of own and cross price elasticities of alcohol demand in the UK—A pseudo-panel approach using the Living Costs and Food Survey 2001–2009," Journal of Health Economics, Elsevier, vol. 34(C), pages 96-103.
    2. Brian Adams & Kevin R. Williams, 2019. "Zone Pricing in Retail Oligopoly," American Economic Journal: Microeconomics, American Economic Association, vol. 11(1), pages 124-156, February.
    3. Cerdá, Magdalena & Johnson-Lawrence, Vicki D. & Galea, Sandro, 2011. "Lifetime income patterns and alcohol consumption: Investigating the association between long- and short-term income trajectories and drinking," Social Science & Medicine, Elsevier, vol. 73(8), pages 1178-1185.
    4. J. E. Stiglitz & P. Dasgupta, 1971. "Differential Taxation, Public Goods, and Economic Efficiency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 151-174.
    5. Ellen E. Bouchery & Henrick J. Harwood & Jeffrey J. Sacks & Carol J. Simon & Robert D. Brewer, "undated". "Economic Costs of Excessive Alcohol Consumption in the U.S., 2006," Mathematica Policy Research Reports f0a7af763751488fafb0eb0ab, Mathematica Policy Research.
    6. Jean‐Pierre Dubé & Jeremy T. Fox & Che‐Lin Su, 2012. "Improving the Numerical Performance of Static and Dynamic Aggregate Discrete Choice Random Coefficients Demand Estimation," Econometrica, Econometric Society, vol. 80(5), pages 2231-2267, September.
    7. Kopczuk, Wojciech, 2003. "A note on optimal taxation in the presence of externalities," Economics Letters, Elsevier, vol. 80(1), pages 81-86, July.
    8. Peltzman, Sam, 1976. "Toward a More General Theory of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 19(2), pages 211-240, August.
    9. Igal Hendel & Aviv Nevo, 2006. "Measuring the Implications of Sales and Consumer Inventory Behavior," Econometrica, Econometric Society, vol. 74(6), pages 1637-1673, November.
    10. Jerry Hausman, 1998. "Taxation by Telecommunications Regulation," NBER Chapters, in: Tax Policy and the Economy, Volume 12, pages 29-48, National Bureau of Economic Research, Inc.
    11. Ben Shiller & Joel Waldfogel, 2011. "Music for a Song: An Empirical Look at Uniform Pricing and Its Alternatives," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 630-660, December.
    12. Igal Hendel & Aviv Nevo, 2006. "Sales and Consumer Inventory," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 543-561, Autumn.
    13. Finkelstein, Amy & Poterba, James & Rothschild, Casey, 2009. "Redistribution by insurance market regulation: Analyzing a ban on gender-based retirement annuities," Journal of Financial Economics, Elsevier, vol. 91(1), pages 38-58, January.
    14. Igal Hendel, 1999. "Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 423-446.
    15. repec:mpr:mprres:7871 is not listed on IDEAS
    16. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
    17. Somaini Paulo & Wolak Frank A., 2016. "An Algorithm to Estimate the Two-Way Fixed Effects Model," Journal of Econometric Methods, De Gruyter, vol. 5(1), pages 143-152, January.
    18. Waldfogel, Joel, 2003. "Preference Externalities: An Empirical Study of Who Benefits Whom in Differentiated-Product Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 557-568, Autumn.
    19. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    20. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    21. Steven T. Berry & Philip A. Haile, 2009. "Nonparametric Identification of Multinomial Choice Demand Models with Heterogeneous Consumers," NBER Working Papers 15276, National Bureau of Economic Research, Inc.
    22. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    23. Richard A. Posner, 1971. "Taxation by Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 22-50, Spring.
    24. Katja Seim & Joel Waldfogel, 2013. "Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions," American Economic Review, American Economic Association, vol. 103(2), pages 831-862, April.
    25. Sungjin Cho & John Rust, 2010. "The Flat Rental Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 560-594.
    26. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 625-652.
    27. Orbach, Barak Y. & Einav, Liran, 2007. "Uniform prices for differentiated goods: The case of the movie-theater industry," International Review of Law and Economics, Elsevier, vol. 27(2), pages 129-153.
    28. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2018. "Market Power and the Laffer Curve," Econometrica, Econometric Society, vol. 86(5), pages 1651-1687, September.
    29. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, January.
    30. Igal Hendel & Aviv Nevo, 2006. "Sales and consumer inventory," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 543-561, September.
    31. Rachel Griffith & Martin O'Connell & Kate Smith, 2017. "Design of optimal corrective taxes in the alcohol market," IFS Working Papers W17/02, Institute for Fiscal Studies.
    32. James B. McDonald, 2008. "Some Generalized Functions for the Size Distribution of Income," Economic Studies in Inequality, Social Exclusion, and Well-Being, in: Duangkamon Chotikapanich (ed.), Modeling Income Distributions and Lorenz Curves, chapter 3, pages 37-55, Springer.
    33. Noll, Roger G., 1989. "Economic perspectives on the politics of regulation," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 22, pages 1253-1287, Elsevier.
    34. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    35. Linneman, Peter, 1980. "The Effects of Consumer Safety Standards: The 1973 Mattress Flammability Standard," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 461-479, October.
    36. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(4), pages 1351-1408.
    37. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    38. Pradeep Chintagunta & Jean-Pierre Dubé & Vishal Singh, 2003. "Balancing Profitability and Customer Welfare in a Supermarket Chain," Quantitative Marketing and Economics (QME), Springer, vol. 1(1), pages 111-147, March.
    39. Jordan, William A, 1972. "Producer Protection, Prior Market Structure and the Effects of Government Regulation," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 151-176, April.
    40. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 205-229.
    41. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
    42. Jerry Hausman, 1998. "Taxation by Telecommunications Regulation," Books, American Enterprise Institute, number 53052, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jeff Thurk, 2015. "Measuring the Unequal Implications of One Size Fits All Regulation," 2015 Meeting Papers 1251, Society for Economic Dynamics.
    2. Miravete, Eugenio & Seim, Katja & Thurk, Jeff, 2013. "Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing," CEPR Discussion Papers 9641, C.E.P.R. Discussion Papers.
    3. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2018. "Market Power and the Laffer Curve," Econometrica, Econometric Society, vol. 86(5), pages 1651-1687, September.
    4. Martin O'Connell & Kate Smith, 2024. "Optimal Sin Taxation and Market Power," American Economic Journal: Applied Economics, American Economic Association, vol. 16(4), pages 34-70, October.
    5. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1445-1488, December.
    6. Steven T. Berry & Philip A. Haile, 2021. "Foundations of Demand Estimation," NBER Working Papers 29305, National Bureau of Economic Research, Inc.
    7. Vincent R. Nijs & Kanishka Misra & Karsten Hansen, 2014. "Outsourcing Retail Pricing to a Category Captain: The Role of Information Firewalls," Marketing Science, INFORMS, vol. 33(1), pages 66-81, January.
    8. Charles J. Romeo, 2016. "Incorporating Prior Information into A GMM Objective For Mixed Logit Demand Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 64(2), pages 336-363, June.
    9. SERSE Valerio,, 2019. "Do sugar taxes affect the right consumers ?," LIDAM Discussion Papers CORE 2019017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. Yonezawa, Koichi & Richards, Timothy J., 2016. "Competitive Package Size Decisions," Journal of Retailing, Elsevier, vol. 92(4), pages 445-469.
    11. Tenn, Steven & Froeb, Luke & Tschantz, Steven, 2010. "Mergers when firms compete by choosing both price and promotion," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 695-707, November.
    12. Sun, Yutec & Ishihara, Masakazu, 2019. "A computationally efficient fixed point approach to dynamic structural demand estimation," Journal of Econometrics, Elsevier, vol. 208(2), pages 563-584.
    13. Matthew Backus & Christopher Conlon & Michael Sinkinson, 2021. "Common Ownership and Competition in the Ready-to-Eat Cereal Industry," NBER Working Papers 28350, National Bureau of Economic Research, Inc.
    14. Timothy Derdenger, 2014. "Technological tying and the intensity of price competition: An empirical analysis of the video game industry," Quantitative Marketing and Economics (QME), Springer, vol. 12(2), pages 127-165, June.
    15. Griffith, Rachel & O’Connell, Martin & Smith, Kate, 2019. "Tax design in the alcohol market," Journal of Public Economics, Elsevier, vol. 172(C), pages 20-35.
    16. Stefano DellaVigna & Matthew Gentzkow, 2019. "Uniform Pricing in U.S. Retail Chains," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(4), pages 2011-2084.
    17. Céline Bonnet, 2007. "Économétrie de la concurrence entre produits différenciés : théorie et méthodes empiriques," L'Actualité Economique, Société Canadienne de Science Economique, vol. 83(4), pages 555-580.
    18. Alessandro Iaria, & Wang, Ao, 2021. "An Empirical Model of Quantity Discounts with Large Choice Sets," The Warwick Economics Research Paper Series (TWERPS) 1378, University of Warwick, Department of Economics.
    19. Jan De Loecker & Paul T. Scott, 2016. "Estimating market power Evidence from the US Brewing Industry," NBER Working Papers 22957, National Bureau of Economic Research, Inc.
    20. Andrea Stella, 2014. "The Magnitude of Menu Costs: A Structural Estimation," 2014 Meeting Papers 436, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. One Markup to Rule Them All: Taxation by Liquor Pricing Regulation (AEJ:MI 2020) in ReplicationWiki

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejmic:v:12:y:2020:i:1:p:1-41. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.