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

See all articles by Christopher T. Conlon

Christopher T. Conlon

Leonard N. Stern School of Business - Department of Economics

Nirupama Rao

University of Michigan, Stephen M. Ross School of Business

Date Written: April 20, 2019

Abstract

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

Conlon, Christopher T. and Rao, Nirupama, Discrete Prices and the Incidence and Efficiency of Excise Taxes (April 20, 2019). Kilts Center at Chicago Booth Marketing Data Center Paper. Available at SSRN: https://ssrn.com/abstract=3375423 or http://dx.doi.org/10.2139/ssrn.3375423

Christopher T. Conlon (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Nirupama Rao

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

Ann Arbor, MI
United States

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