Reformulation and taxes for healthier consumption: Empirical evidence in the French Dessert market

Many countries have implemented the taxation of unhealthy food. Facing such a tax, firms can adapt their pricing strategy and modify the characteristics of their products. There are, so far, only a few ex-ante analyses of the impact of taxes on consumption that endogenize the price response of firms to the tax policy. However, none of them takes into account the possibility for firms to modify the characteristics of a product. In this paper, we propose an ex-ante evaluation of the effects of a tax that targets products high in caloric sweeteners on key market outcomes, by integrating not only the strategic price reactions of firms, but also the exogenous changes in a product's nutritional composition. We develop a structural econometric model that integrates the consumer's substitution patterns between products, accounts for competition between firms, and integrates the possibility for firms to modify the characteristics of a product in response to taxation. Using household scanner data from the French dessert market, we show that ignoring how firms might react to a tax policy leads to a significant underestimation of the potential impact of taxation on the consumption of taxed nutrients. In our case, we show that ignoring the combined effect of strategic price reactions and product reformulation leads to the impact of the tax on the intake of the taxed nutrient being underestimated by 44%. From a policy-oriented perspective, we conclude that a taxation scheme should be designed to favor product reformulation by firms.