Discrete Prices and the Incidence and Efficiency of Excise Taxes

57 Pages Posted: 11 Aug 2016 Last revised: 6 Dec 2019

See all articles by Christopher T. Conlon

Christopher T. Conlon

Columbia University

Nirupama Rao

University of Michigan, Stephen M. Ross School of Business

Date Written: October 30, 2019

Abstract

This paper uses UPC-level data to examine the relationship between excise taxes, retail prices, and consumer welfare in the distilled spirits market. We document a nominal rigidity in retail prices that arises because firms largely choose prices that end in ninety-nine cents and change prices in whole-dollar increments. A correctly specified model, like an ordered logit, takes this discreteness into account when predicting the effects of alternative taxes. Explicitly accounting for price points substantially impacts estimates of tax incidence and the excess burden cost of tax revenue. Meaningful non-monotonicities in these quantities expand the potential considerations in setting excise taxes.

Keywords: Excise Tax, Incidence, Market Power, Price Adjustment, Nominal Rigidities

JEL Classification: H21, H22, H71

Suggested Citation

Conlon, Christopher T. and Rao, Nirupama, Discrete Prices and the Incidence and Efficiency of Excise Taxes (October 30, 2019). Available at SSRN: https://ssrn.com/abstract=2813016 or http://dx.doi.org/10.2139/ssrn.2813016

Christopher T. Conlon

Columbia University ( email )

420 W 118th St
New York, NY 10027
United States

Nirupama Rao (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

Ann Arbor, MI
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
122
Abstract Views
1,307
Rank
496,454
PlumX Metrics