This paper uses UPC-level data to examine the relationship between excise taxes, retail prices, and consumer welfare in the distilled spirits market. We document a nominal rigidity in retail prices that arises because firms largely choose prices that end in 99 cents and change prices in whole-dollar increments. A correctly specified model, like an ordered logit, takes this discreteness into account when predicting the effects of alternative taxes. Explicitly accounting for price points substantially impacts estimates of tax incidence and the excess burden cost of tax revenue. Meaningful nonmonotonicities in these quantities expand the potential considerations in setting excise taxes.
Conlon, Christopher T., and Nirupama L. Rao.
"Discrete Prices and the Incidence and Efficiency of Excise Taxes."
American Economic Journal: Economic Policy,
Taxation and Subsidies: Incidence
State and Local Taxation, Subsidies, and Revenue
Production, Pricing, and Market Structure; Size Distribution of Firms
Food; Beverages; Cosmetics; Tobacco; Wine and Spirits