Pass-through and competition: the impact of soft drink taxes as seen through Mexican supermarkets

Abstract

In January 2014, Mexico addressed its epidemic of obesity by implementing an excise tax of 1 peso (1 MXN) per liter on soft drinks. This study evaluates the pass-through of the tax, the influence on the tax of competition among different stores, and the after-tax price dispersion. Using an unbalanced panel of weekly prices for 553 stores throughout Mexico, we estimate that the tax increases the per-liter price of soda by 1.12 pesos, of juice by 0.25 pesos, of sports drinks by 1.52 pesos, and of powdered drink mixes by 0.24 pesos. Using information on store locations, we also calculate the degree of competition faced by each store and find that with greater competition in the relevant market, there is less overall pass-through, although the results for individual drink types are statistically significant only for sodas. For those stores facing the greatest competition, the pass-through effect is perfect shifting. We also find that markets with greater competition show a lesser degree of price dispersion.