Working Paper: CEPR ID: DP18527
Authors: Rossi Abirafeh; Pierre Dubois; Rachel Griffith; Martin O'Connell
Abstract: We develop a dynamic equilibrium model of firm competition to study the impact of counterfactual policies, such as taxes and advertising restrictions, on pricing, advertising, consumption and welfare. We estimate the model using micro level data on the market for colas. We use consumer level exposure to television commercials to estimate the impact of advertising on product choice, model firms' dynamic competition through their choice of advertising budgets and product prices, and exploit firms' practice of delegating decisions over advertising slots to agencies to link the rich consumer level advertising variation with firms' strategic choice variables. We show that a sugar-sweetened beverage tax leads to a reduction in advertising and that the incremental effects of implementing advertising restrictions are substantially reduced with a tax in place.
Keywords: taxation; advertising; discrete choice; demand; dynamic oligopoly
JEL Codes: D12; H22; I18; L13; M37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sugar-sweetened beverage tax (H25) | reduction in advertising expenditures by firms (M37) |
| advertising restrictions + tax (M38) | lower incremental effects on advertising (M37) |
| specific tax (H20) | reductions in advertising for taxed products (H23) |
| ad valorem tax (H25) | reductions in advertising for taxed products (H23) |
| advertising for regular cola (M37) | increases demand for regular cola (D12) |
| advertising for regular cola (M37) | positively influences demand for diet cola (D12) |
| advertising for regular cola (M37) | positively influences demand for Pepsi (D12) |
| tax increase (H29) | switch away from taxed brands by advertising-sensitive consumers (M37) |