Firm types, price-setting strategies, and consumption-tax incidence

Jarkko Harju; Tuomas Kosonen; Oskar Nordström Skans

doi:10.1016/j.jpubeco.2018.06.006

Firm types, price-setting strategies, and consumption-tax incidence

Jarkko Harju
, Tuomas Kosonen^*
, Oskar Nordström Skans

^*Corresponding author for this work

Research output: Contribution to journal › Article › Scientific › peer-review

21 Citations (Scopus)

Abstract

We analyze price responses to large restaurant VAT rate reductions in two different European countries. Our results show that responses in the short and medium run were clustered around two focal points of zero pass-through and full pass-through. Differences between independent restaurants and chains is the key explanation for this pattern. While nearly all independent restaurants effectively ignored the tax reductions and left consumer prices unchanged, a substantial fraction of restaurants belonging to chains chose a rapid and complete pass-through. In the longer run, prices converged, but primarily through a price reversion among chain restaurants. The stark difference in price responses does not appear to arise because of different market characteristics such as location, initial price levels, meal types and restaurant segment.

Original language	English
Pages (from-to)	48-72
Number of pages	25
Journal	Journal of Public Economics
Volume	165
DOIs	https://doi.org/10.1016/j.jpubeco.2018.06.006
Publication status	Published - Sept 2018
Externally published	Yes
Publication type	A1 Journal article-refereed

Funding

We are grateful for comments by Alan Auerbach, Raj Chetty, Helmuth Cremer, Glenn Ellison, Xavier Gabaix, Bengt Holmström, Jim Hines, Jim Poterba, Emmanuel Saez, Håkan Selin, Joel Slemrod, Jean Tirole, Juuso Toikka, Juuso Välimäki, and Heidi Williams as well as participants at the NBER Summer Institute, ASSA, NTA, IIPF, EEA and CESifo conferences and at various other seminars, in particular at MIT and University of Michigan. We thank our teams of price collectors in Sweden, Finland and Estonia for providing excellent assistance. We are grateful for a partial funding of this project by the Academy of Finland and separately by IFAU in Sweden.

Keywords

Firm types
Price setting
Restaurants
VAT incidence

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.jpubeco.2018.06.006

Cite this

@article{0e50551b514044488baab941b786137e,

title = "Firm types, price-setting strategies, and consumption-tax incidence",

abstract = "We analyze price responses to large restaurant VAT rate reductions in two different European countries. Our results show that responses in the short and medium run were clustered around two focal points of zero pass-through and full pass-through. Differences between independent restaurants and chains is the key explanation for this pattern. While nearly all independent restaurants effectively ignored the tax reductions and left consumer prices unchanged, a substantial fraction of restaurants belonging to chains chose a rapid and complete pass-through. In the longer run, prices converged, but primarily through a price reversion among chain restaurants. The stark difference in price responses does not appear to arise because of different market characteristics such as location, initial price levels, meal types and restaurant segment.",

keywords = "Firm types, Price setting, Restaurants, VAT incidence",

author = "Jarkko Harju and Tuomas Kosonen and Skans, \{Oskar Nordstr{\"o}m\}",

note = "Funding Information: We are grateful for comments by Alan Auerbach, Raj Chetty, Helmuth Cremer, Glenn Ellison, Xavier Gabaix, Bengt Holmstr{\"o}m, Jim Hines, Jim Poterba, Emmanuel Saez, H{\aa}kan Selin, Joel Slemrod, Jean Tirole, Juuso Toikka, Juuso V{\"a}lim{\"a}ki, and Heidi Williams as well as participants at the NBER Summer Institute, ASSA, NTA, IIPF, EEA and CESifo conferences and at various other seminars, in particular at MIT and University of Michigan. We thank our teams of price collectors in Sweden, Finland and Estonia for providing excellent assistance. We are grateful for a partial funding of this project by the Academy of Finland and separately by IFAU in Sweden. Publisher Copyright: {\textcopyright} 2018 Elsevier B.V.",

year = "2018",

month = sep,

doi = "10.1016/j.jpubeco.2018.06.006",

language = "English",

volume = "165",

pages = "48--72",

journal = "Journal of Public Economics",

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AU - Harju, Jarkko

AU - Kosonen, Tuomas

AU - Skans, Oskar Nordström

N1 - Funding Information: We are grateful for comments by Alan Auerbach, Raj Chetty, Helmuth Cremer, Glenn Ellison, Xavier Gabaix, Bengt Holmström, Jim Hines, Jim Poterba, Emmanuel Saez, Håkan Selin, Joel Slemrod, Jean Tirole, Juuso Toikka, Juuso Välimäki, and Heidi Williams as well as participants at the NBER Summer Institute, ASSA, NTA, IIPF, EEA and CESifo conferences and at various other seminars, in particular at MIT and University of Michigan. We thank our teams of price collectors in Sweden, Finland and Estonia for providing excellent assistance. We are grateful for a partial funding of this project by the Academy of Finland and separately by IFAU in Sweden. Publisher Copyright: © 2018 Elsevier B.V.

PY - 2018/9

Y1 - 2018/9

N2 - We analyze price responses to large restaurant VAT rate reductions in two different European countries. Our results show that responses in the short and medium run were clustered around two focal points of zero pass-through and full pass-through. Differences between independent restaurants and chains is the key explanation for this pattern. While nearly all independent restaurants effectively ignored the tax reductions and left consumer prices unchanged, a substantial fraction of restaurants belonging to chains chose a rapid and complete pass-through. In the longer run, prices converged, but primarily through a price reversion among chain restaurants. The stark difference in price responses does not appear to arise because of different market characteristics such as location, initial price levels, meal types and restaurant segment.

AB - We analyze price responses to large restaurant VAT rate reductions in two different European countries. Our results show that responses in the short and medium run were clustered around two focal points of zero pass-through and full pass-through. Differences between independent restaurants and chains is the key explanation for this pattern. While nearly all independent restaurants effectively ignored the tax reductions and left consumer prices unchanged, a substantial fraction of restaurants belonging to chains chose a rapid and complete pass-through. In the longer run, prices converged, but primarily through a price reversion among chain restaurants. The stark difference in price responses does not appear to arise because of different market characteristics such as location, initial price levels, meal types and restaurant segment.

KW - Firm types

KW - Price setting

KW - Restaurants

KW - VAT incidence

U2 - 10.1016/j.jpubeco.2018.06.006

DO - 10.1016/j.jpubeco.2018.06.006

M3 - Article

AN - SCOPUS:85050110893

SN - 0047-2727

VL - 165

SP - 48

EP - 72

JO - Journal of Public Economics

JF - Journal of Public Economics

ER -

Firm types, price-setting strategies, and consumption-tax incidence

Abstract

Funding

Keywords

ASJC Scopus subject areas

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