Consumer demand for alcoholic beverages in Switzerland: a two-stage quadratic almost ideal demand system for low, moderate, and heavy drinking households

Abstract

In this study, we estimate final demand for beverages with a particular focus on alcoholic beverages and calculate elasticities using microdata from the Swiss household expenditure survey from 2000 to 2009, which containsdata from more than 34,000 households. We estimate price and income responses for three household segments — light, moderate, and heavy drinking households — to assess whether higher alcohol consumption could be described by different price and income elasticities in comparison to lower alcohol consumption. We obtain unconditional estimates by applying a two-stage budgeting quadratic almost ideal demand system. To generate missing price data, we used the recently proposed quality adjusted price approach. Due to a high share of zero consumption for some beveragescategories,we correct the model with a two-step estimation procedure. Estimation results show that heavy drinking households are much less price elastic with respect to wine and beer in comparison to moderate or light drinking households, while the price response for spirits is almost constant over the three segments. Before implementing a new tax for alcoholic beverages in Switzerland, the social, health, and economic effects of a rather small decrease in alcohol consumption among heavy drinking households must be weighed against possible negativeconsequences of a sharp decline in light or moderate drinking households.