Monday, 29 April 2019
10:00 – 11:30
Boardroom. Level 38, Canary Wharf
Marketing and Analytics
Increasingly more countries are adopting new commodity taxes to discourage consumption of socially undesirable or unhealthy products. When considering implementation of such taxes, the current policy and academic discussions have focused on potential outcomes due to price changes. In this paper, we document that price changes consider only the immediate response to tax policy changes. We draw from a model of vertical product diﬀerentiation that product variety and quality can be impacted by changes in tax policy. We then show these eﬀects empirically by studying the Korean alcohol tax reform of 2000, which was triggered by an international dispute over a favorable tax rate levied on domestic products, and brought about an exogenous shock to the tax regime for overall alcoholic product categories. We ﬁnd that as taxes increase, (1) markets become more concentrated, accelerated by ﬁrms exiting the market, and (2) ﬁrms reduce their product variety. Further, in product categories with tax decreases, we document that markets become less concentrated and there is an increase in product variety. Our results suggest that extant research focusing on price should be understood as a partial equilibrium. For policy decisions, researchers should consider the full equilibrium with ﬁrms’ entry and exit and assortment decisions.
Last updated Tuesday, 30 April 2019