Consumer, manufacturer and retailer responses to health price policies: the example of EU sugar price reform on the soft drink market

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 analyses. Rather, passive pricing is assumed. Ignoring strategic pricing might lead to under-estimate or over-estimate the impact of food taxation. Based on the example of the soft drink industry, we analyse the bias which is introduced when assuming passive pricing. Using structural econometric model, we first estimate models of vertical relationships between the beverage industry and the retail industry. After selecting the 'best' model of vertical relationships, we then simulate different scenrios of input cost changes or final products taxation. Our results indicate that assuming passive pricing by firms leads to under-estimate the impact on food consumption. In our example, the under-estimation amounts to 15% for regular products and 50% for diet ones when contracts between manufacturers and retailers are not taken into account. We thus conclude that for empirical analysis of food price policies for better health, considering strategic pricing is a key issue.