Discrete Prices and the Incidence and Efficiency of Excise Taxes
Kilts Center at Chicago Booth Marketing Data Center Paper
50 Pages Posted: 20 May 2019
Date Written: April 20, 2019
This paper uses detailed UPC-level data from Nielsen to examine the relationship between excise taxes, retail prices, and consumer welfare in the market for distilled spirits. Empirically, we doc- ument the presence of 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. Theoretically, we show that this rigidity can rationalize both highly incomplete and excessive pass-through esti- mates without restrictions on the underlying demand curve. A correctly specified model, such as an (ordered) logit, takes this discreteness into account when predicting the effects of alternative tax changes. We show that explicitly accounting for discrete pricing has a substantial impact both on estimates of tax incidence and the excess burden cost of tax revenue. Quantitatively, we document substantial non-monotonicities in both of these quantities, expanding the potential scope of what policymakers should consider when raising excise taxes.
Keywords: Excise Tax, Incidence, Market Power, Price Adjustment, Nominal Rigidities
JEL Classification: H21, H22, H71
Suggested Citation: Suggested Citation