Sin taxes in differentiated product oligopoly: an application to the butter and margarine market

There is policy interest in using tax to change food purchasing behaviour. The literature has not accounted for the oligopolistic structure of the industry. In oligopoly the impact of taxes depend on preferences, and how firms pass tax onto prices. We consider a tax on saturated fat. Using transaction level data we find that the form of tax and firms’ strategic behaviour are important determinants of the impact. Our results suggest that an excise tax is more effi cient than an ad valorem tax at reducing saturated fat purchases and an ad valorem tax is more effi cient at raising revenue. JEL: L13, H20, I18 Correspondence: rgriffi [email protected], [email protected], [email protected] Acknowledgement: The authors would like to thank Greg Crawford, Peter Davis and Aviv Nevo for useful comments. Financial support from the ESRC through the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS (CPP) and the ESRC Centre for Microdata Methods and Practice (CeMMAP) is gratefully acknowledged. All errors remain the responsibility of the authors.