How Do National Firms Respond to Local Shocks?: Evidence from Excise Taxes

73 Pages Posted: 16 Nov 2020

See all articles by R. Andrew Butters

R. Andrew Butters

Indiana University

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Boyoung Seo

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: September 29, 2020

Abstract

[enter Abstract Body]The pass-through of local shocks to prices is important for trade adjustment, inequality, and tax policy. Standard pricing models assume that firms fully respond to local shocks, but recent research suggests that local prices may be insensitive to them, because national chains charge geographically uniform prices. Using data on beer, liquor, cigarette, and soda prices in 34,000 retail stores, we examine the impact of 73 local costs shocks induced by excise tax changes. Even though within-firm prices vary little across geographic markets, we find local prices respond sharply to local cost shocks. Local excise taxes are passed-through to local prices, with no spill-overs to unaffected stores in affected chains. Pass-through rates are similar for national and local chains, and for county, state, and federal taxes. Pricing frictions do not attenuate local cost pass-through, suggesting prices respond asymmetrically to local cost and demand shocks. We discuss implications for pricing models.

Keywords: uniform pricing, excise taxes, firm optimization, tax incidence

JEL Classification: D40, L11, L81

Suggested Citation

Butters, R. and Sacks, Daniel W. and Seo, Boyoung, How Do National Firms Respond to Local Shocks?: Evidence from Excise Taxes (September 29, 2020). Available at SSRN: https://ssrn.com/abstract=3535206 or http://dx.doi.org/10.2139/ssrn.3535206

R. Butters

Indiana University ( email )

1309 E. Tenth St.
Bloomington, IN 47405
United States

HOME PAGE: http://https://kelley.iu.edu/BEPP/faculty/page14113.cfm?ID=46947

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Boyoung Seo (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3667 (Phone)

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