How does a Change in the Excise Tax on Beer Impact Beer Retail Prices in South Africa?

• DOI: http://doi.org/10.1111/saje.12123
• Published date: 01 December 2016
• Date: 01 December 2016
• Author: Corne van Walbeek,Caitlan Russell

HOW DOES A CHANGE IN THE EXCISE TAX ON BEER

IMPACT BEER RETAIL PRICES IN SOUTH AFRICA?

CAITLAN RUSSELL

†

AND CORNE VAN WALBEEK*

Abstract

This article uses price data, collected by Statistics South Africa, to estimate the effect of a change in

the excise tax on the retail price of beer. We find strong evidence that the excise tax on beer is over-

shifted to consumers. The pass-through coefficient is estimated at 4.83 (95% CI: 4.02; 5.64) for

lager, and at 4.77 (95% CI: 4.04; 5.50) for all beer (which includes dark beer). This implies that for

every R1/unit increase in the excise tax, the retail price increases by about R4.80/unit. Of the 23

brand-packaging combinations considered, the pass-through coefficients vary between 2.39 and

10.05 (median 55.30).Themajorityofthepricechangein response to a tax change occurs immedi-

ately, and prices have fully adjusted two months after the excise tax increase becomes effective. Pass-

through differs substantially across packaging types. The pass-through coefficient on 750 ml bottles is

substantially lower than that of 330 ml (or 340 ml) cans and 6 3330 ml (or 6 3340 ml) “six-

packs.” The overshifting of the excise tax has positive implications for public health policy, since they

increase the effectiveness of alcohol taxes as a tool to reduce the (excessive) consumption of beer.

JEL Classification: D22, H22, L13, L66

Keywords: Excise tax, pass-through, beer, South Africa

1. INTRODUCTION

Most introductory economics textbooks discuss the incidence of a tax imposed on a

product as an application of demand and supply analysis (Frank and Bernanke, 2013;

Mohr and Associates, 2015). If the tax is paid by the producer (as is typically the case),

the imposition of the tax causes the supply curve to shift vertically upward by the

amount of the tax. At the new equilibrium, the price is higher and the quantity is lower

than at the original equilibrium. Typically the price increases by less than the amount of

the tax, because a part of the tax increase is borne by the producer. The degree to which

the tax is passed on to the consumer is determined by the slopes (and thus the price elas-

ticities) of the supply and demand curves. In this paradigm, it is not possible for the

price to increase by more than the increase in the tax, and in most instances the retail

price increases by less than the increase in the tax.

This theory describes a perfectly competitive market, an assumption often overlooked

in the exposition of the analysis. In many industries, including the alcohol industry in

South Africa, the assumption of perfect competition does not hold. The South African

alcohol industry, like the alcohol industries of many other countries, is in fact highly con-

centrated. In the beer industry, firms like South African Breweries (a subsidiary of

* Corresponding author: Professor, University of Cape Town, School of Economics, Cape

Town, South Africa. E-mail: cwalbeek@gmail.com

†

Postgraduate student at London School of Economics and Political Science, United King-

dom; previously postgraduate student at University of Cape Town, School of Economics.

V

C2016 Economic Society of South Africa. doi: 10.1111/saje.12123

555

South African Journal of Economics Vol. 84:4 December 2016

South African Journal

of Economics

SABMiller Plc), Brandhouse Beverages (selling Heineken brands under licence in South

Africa) and Namibia Breweries Ltd. have significant market power.

South African Breweries (SAB) is the market leader with a total market share of nearly

80% of the total beer market (including sorghum beer), and nearly 90% of the total

beer market excluding sorghum beer. The dominant SAB brands are Carling Black Label

(approximate 26% market share), Hansa Pilsner (21%), Castle (18%) and Castle Light

(9%) (Euromonitor, 2014). Brandhouse’s main brands are Amstel (3.6% market share in

2013) and Heineken (2.6% share in 2013). More than 98% of beer consumed in South

Africa is produced in the Southern African Customs Union (SACU). Despite SABMil-

ler’s large international footprint, beer exports comprise less than 2% of SACU’s produc-

tion (Euromonitor, 2014). Whilst there is fierce competition between SABMiller and the

other producers in terms of product development, licencing, advertising and marketing,

there has not been a price war in the past 15 years.

In a competitive industry, like the one students implicitly encounter when they taught

about the incidence of a tax, the tax will be undershifted, because the price increases by

less than the increase in the tax. In extreme cases (specifically if the supply curve is per-

fectly elastic or the demand curve is perfectly inelastic) there would be full pass-through

of the tax, i.e. the price increases by the full amount of the tax increase. Overshifting of

the tax, i.e. a situation where the price increases by more than the increase in the excise

tax, is theoretically not possible in a competitive industry. However, in an industry where

firms have pricing power, overshifting of the tax is possible. Depending on the degree of

competition between firms, the price elasticity of demand for the product, whether the

product is addictive or not, and the length of firms’ planning horizons, firms may have

an incentive to raise the retail price by more than the increase in the excise tax.

Over the past 20 years the South African government has raised the real excise tax on

alcohol, although they are modest in comparison to the excise tax increases on cigarettes

(Van Walbeek et al., 2013a). Other than raising tax revenue, the tax increases were aimed

at reducing the consumption of alcohol and the negative externalities associated with

excessive alcohol use. Between 1994 and 2014 the real excise tax on beer increased from

R47.53 to R68.92 per litre of pure alcohol (all values in 2014 prices). Over this period,

recorded per capita beer consumption decreased from 97.3 litres to 78.0 litres per adult

(age 151; assuming 5% alcohol content). Beer is the alcoholic beverage of choice for

many South Africans; between 55% and 60% of recorded pure alcohol in South Africa

is consumed in the form of beer.

The trends of the past 20 years suggest that there is a negative relationship between

the excise tax on beer and beer consumption. A recent review of alcohol taxation by the

National Treasury (2014) cites a number of studies that have estimated the price elasticity

of demand for alcohol in South Africa. According to a study by the Bureau for Economic

Research (2010) the price elasticity for beer was estimated at 20.7. An earlier study by

the National Treasury (2001) estimated the price elasticity of beer at 20.47. These price

elasticity estimates for alcohol are similar to those found in many other countries (Van

Walbeek et al., 2013b). A recent study using South African cross-sectional data found

that the price elasticity of all alcohol (i.e. not subdivided by category) was 20.52 (95%

CI: 20.49; 20.54) (Chelwa et al., 2013). While there are some differences between

these price elasticity estimates due to differences in estimation techniques, type of data

and length of time, the message is clear: beer consumption is significantly influenced by

beer prices, but the price elasticity falls in the inelastic range.

556 South African Journal of Economics Vol. 84:4 December 2016

V

C2016 Economic Society of South Africa.