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Alcohol Tax, Price–Quality Proxy and Discounting: A Reason Why Alcohol Taxes May Rebound

Authors

  • Luca A. Panzone

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    • Department of Economics and the Sustainable Consumption Institute, Manchester University, Arthur Lewis Building, Oxford Road, Manchester, M13 9PL, UK. E-mail: luca.panzone@manchester.ac.uk for correspondence. I am thankful to Lorenza Quintaliani, Giacomo Zanello, Viviana Albani, Ariane Kehlbacher, Noppamas Karoon, Elisabetta Pirodda and Aurelia Samuel for their support in the data collection. I am indebted to Richard Tiffin, Kelvin Balcombe and Lucia Baldi for their extremely valuable inputs and support in the data analysis. I am also grateful to: Garth Holloway, Bruce Traill and Iain Fraser for useful conversations; Carlo Reggiani, Valentina Raimondi and Alessandro Olper for helpful suggestions on a previous version of this article; Viviana Albani for support in the revision phase and to Stephen Smith for providing useful material. I am also grateful to David Harvey and an anonymous referee whose comments considerably improved this study. Any remaining errors are solely the author's responsibility.


Abstract

The increasing concern about the external costs of alcohol consumption has often led economists and policy-makers to advocate taxes to internalise the social costs and target consumption. However, in certain markets for alcoholic drinks – particularly wine – price is not only a cost but also an indicator of quality, guiding consumer choice. There is, perhaps, a higher probability of ex post satisfaction with products at higher prices in a market with potential adverse selection. The price–quality proxy interacts with discounts, where the full price of the product before discount (referred to as the External Reference Price in the marketing literature) is used as a quality reference.

This study shows that an alcohol tax in the presence of discounting may increase the perceived value of the product, and therefore persuade consumers to prefer the purchase of more expensive wines with the highest discount. As a consequence, consumers could favour products with higher alcohol content – which contradicts the objectives of the policy. Consequently, for an alcohol tax to be effective discounting of alcoholic beverages (in particular, wine) should be regulated to avoid the policy backfiring.

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