Soda taxes

Karl Smith takes on researchers at USDA-ERS (the USDA agency where I used to work) who investigated soda demand and what their estimated elasticities implied about the effect a soda tax would have obesity.  I skimmed the study and have some issues with it.  My main issues differ a lot from Karl's.  Karl is right, of course, but I think the adjustments he has in mind require some heroic assumptions.  Given the results, others could easily make those assumptions and derive adjusted implications.  USDA-ERS is usually good about including lots of caveats and they probably should have discussed the issues Karl raised.

My problem with the study is that there is no explicit accounting for what drives price fluctuations in the demand study.  Prices don't vary randomly across consumers with consumers then deciding how much to buy at the given the price.  Prices tend to be higher in places where retailers know consumers are willing to pay more.  Put another way, it it's not clear that demand is held constant when looking at price variations.  This would generally cause bias toward a less responsive demand than would be seen in reality.

While one may think this would lend support for the idea of a soda tax, this is not so.  The reason prices vary with demand also has a lot to do with the nature of the market.  The soda market is oligopsonistic (Coke and Pepsi and all that), and perhaps monopolistically competitive at the retail level.  A 20 percent tax on soda is likely to lead to a much smaller increase in price.  After all, the marginal cost of a soda is the tiniest fraction of price.  (You don't really need to google that, do you?) This means soda producers and retailers will absorb a lot of the tax burden.

I do, however, think this is an interesting question.  If you've got a good idea for finding exogenous (ie., as if random) variation in soda prices then maybe you could write an interesting paper on how soda quantity demanded actually varies with price.  A more interesting and more ambitious study would find a clever way to model the whole oligopsonistic (and/or monopolistically competitive) soda market, and use that model to estimate the effect of soda taxes on actual consumption.

Update:  Via Catherine Rampell at NYTimes Economix (by the way, love her links), this study by Courtemanche and Carden, of genre similar to the USDA-ERS study, at least attempts a clear identification strategy.