Discrete Prices and the Incidence and Efficiency of Excise Taxes

Kilts Center at Chicago Booth Marketing Data Center Paper

NYU Stern School of Business

57 Pages Posted: 20 May 2019 Last revised: 31 Mar 2020

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: 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). Kilts Center at Chicago Booth Marketing Data Center Paper, NYU Stern School of Business, 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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