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One Markup to Rule Them All: Taxation by Liquor Pricing Regulation

Author

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  • Eugenio J. Miravete
  • Katja Seim
  • Jeff Thurk
Abstract
Commodity taxation often involves uniform tax rates. We use alcohol laws that tax differentiated spirits with a comprehensive uniform markup to evaluate redistribution generated by such simple tax policy. We document preference heterogeneity among consumers, variation in product demand elasticities, and market power among producers with heterogeneous product portfolios. Relative to more flexible product-level markups recognizing demand heterogeneity and strategic price responses of firms, we find that the uniform markup underprices less elastic spirits, implicitly subsidizing low-income and less educated residents. The uniform markup grants additional market power to small specialized firms whose product positioning benefits from the policy.

Suggested Citation

  • Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2020. "One Markup to Rule Them All: Taxation by Liquor Pricing Regulation," American Economic Journal: Microeconomics, American Economic Association, vol. 12(1), pages 1-41, February.
    • Handle: RePEc:aea:aejmic:v:12:y:2020:i:1:p:1-41
    DOI: 10.1257/mic.20180155
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    3. Gehrsitz, Markus & Saffer, Henry & Grossman, Michael, 2021. "The effect of changes in alcohol tax differentials on alcohol consumption," Journal of Public Economics, Elsevier, vol. 204(C).
    4. Brett Hollenbeck & Kosuke Uetake, 2021. "Taxation and market power in the legal marijuana industry," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 559-595, September.
    5. Kosonen, Tuomas & Jysmä, Sami & Savolainen, Riikka, 2024. "Studying a Sin Tax Scheme with Multiple Reforms - Lessons for Consumption Taxation," Working Papers 164, VATT Institute for Economic Research.
    6. Amir, Rabah & Jin, Jim Y. & Lasselle, Laurence, 2023. "Uniform, efficient and independent Ramsey taxes across markets," Games and Economic Behavior, Elsevier, vol. 138(C), pages 373-386.
    7. Aguirregabiria, Victor & Guiton, Francis, 2022. "Decentralized Decision-Making in Retail Chains: Evidence from Inventory Management," CEPR Discussion Papers 17149, C.E.P.R. Discussion Papers.
    8. Rachel Griffith & Martin O’Connell & Kate Smith, 2022. "Price Floors and Externality Correction," The Economic Journal, Royal Economic Society, vol. 132(646), pages 2273-2289.
    9. Griffith, Rachel & O’Connell, Martin & Smith, Kate, 2019. "Tax design in the alcohol market," Journal of Public Economics, Elsevier, vol. 172(C), pages 20-35.
    10. Matthew Grennan & Robert J. Town, 2020. "Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices," American Economic Review, American Economic Association, vol. 110(1), pages 120-161, January.
    11. Simon Cowan, 2018. "Regulating monopoly price discrimination," Journal of Regulatory Economics, Springer, vol. 54(1), pages 1-13, August.
    12. Hindriks, Jean & Serse, Valerio, 2019. "Heterogeneity in the tax pass-through to spirit retail prices: Evidence from Belgium," Journal of Public Economics, Elsevier, vol. 176(C), pages 142-160.
    13. Brantly Callaway & Tong Li & Joel Rodrigue & Yuya Sasaki & Yong Tan, 2024. "Regulation, Emissions and Productivity: Evidence from China’s Eleventh Five-Year Plan," Staff Working Papers 24-7, Bank of Canada.
    14. Daniel Chaves, 2022. "Market Power, Taxation and Product Variety in the Brazilian Automobile Industry," University of Western Ontario, Departmental Research Report Series 20227, University of Western Ontario, Department of Economics.
    15. Pál, László & Sándor, Zsolt, 2023. "Comparing procedures for estimating random coefficient logit demand models with a special focus on obtaining global optima," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    16. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2018. "Market Power and the Laffer Curve," Econometrica, Econometric Society, vol. 86(5), pages 1651-1687, September.
    17. Richards, Timothy J. & Paudel, Ujjwol, 2024. "Minimum Wages and Pass-Through," 2024 Annual Meeting, July 28-30, New Orleans, LA 343648, Agricultural and Applied Economics Association.
    18. Guojun He & Jeffrey T. LaFrance & Jeffrey M. Perloff & Richard Volpe, 2024. "How do Everyday-Low-Price Supermarkets Adjust Their Prices?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(1), pages 117-146, February.
    19. Johannes Kasinger, 2024. "Shrouded Sin Taxes," Papers 2409.01493, arXiv.org.
    20. Diwas KC & TI Tongil Kim & Jiayi Liu, 2022. "Electronic prescription monitoring and the opioid epidemic," Production and Operations Management, Production and Operations Management Society, vol. 31(11), pages 4057-4074, November.
    21. Bokhari, Farasat A.S. & Dobson, Paul W. & Morciano, Marcello & Suhrcke, Marc, 2023. "Banning volume discounts to curb excessive consumption: A cautionary tale," European Economic Review, Elsevier, vol. 156(C).
    22. Doi, Naoshi & Kono, Tatsuhito & Suzaki, Izumo, 2023. "Optimizing Multiple Airport Charges with Endogenous Airline Quality Considering the Marginal Cost of Public Funds," MPRA Paper 116176, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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    1. One Markup to Rule Them All: Taxation by Liquor Pricing Regulation (AEJ:MI 2020) in ReplicationWiki

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