Tuesday, December 22, 2015

Can imposition of punitive taxes on high calorie foods have any impact on buying behavior of consumers? The imponderable factors

Three great "sinners" among foods which are held responsible for most of the adverse health conditions in the world are sugar, fat and salt, added to the foods being churned out by the industry. Hardly a day passes without someone or the other indulging in bashing of these so called culprits and calling for policy changes that can make such foods for the citizens too expensive which hopefully would be a disincentive to frequent buying. What is lost in this debate is that escalating the consumer price has never worked as expected where ever such punitive action was taken. Therefore there are doubts whether such fiscal measures can work at all. Most dreaded of all foods are high calorie laden ones which are blamed for many health disorders like obesity, CVD and metabolic syndrome and naturally these foods provide easy targets for imposing extra taxes by the government. Since obesity has assumed epidemic proportion in countries like the US and which defies solution it is assumed that disincentivising purchase of foods rich in sugar and fat may work though no one has any clear answer as to what should be the price differential between lower calorie foods and high calorie foods. Against this background a recent study in the US throws some insight into the buying behavior of consumers when confronted with a market situation where differential pricing was prevalent. Read further to get an essence and significance of the findings to appreciate its relevance in today's world.      

"Professors Romana Khan at Northwestern University, Kanishka Misra at University of Michigan, and Vishal Singh at the New York University Stern School of Business looked at situations that mimic a "fat tax", a peculiar pricing pattern of milk in the U.S., where relative prices for milk across fat content - whole, 2%, 1% and skim - vary depending on where you live and which store you happen to patronize. At some stores, prices are equal across all fat content; at others, prices decrease with fat content, with whole milk the most expensive and skim the cheapest option. "The question that comes to mind is whether these different price structures have an impact on people's choices To put it simply, do people switch to lower fat milk for a price difference as small as 15 cents per gallon?" said Khan. "The answer to this question is of interest because it relates to the hotly debated issue of whether a 'fat' or 'sugar' tax can be an effective mechanism to curb obesity."  The study finds that in markets where milk prices are equal across fat alternatives, people tend to choose whole milk over lower calorie alternatives, particularly in low income zip codes: at equal prices across fat content, the market share of whole milk is 52% in lower income areas compared to 25% in higher income areas. What happens in markets where whole milk is priced at a premium? Although the average price difference for a gallon of milk is just 14 cents (5%), it causes a significant shift in market share away from whole milk to lower-fat options. This shift to the lower calorie options is significantly more pronounced in low-income neighborhoods. Besides income, the analysis accounts for other factors such as age profile, racial mix, and educational attainment of the local customer base. A critical factor in the analysis is that the prevailing price structure--whether prices across fat content are the same or not -- is determined by the chain's policy at the regional level and does not vary with local demographics or competition. "This provides us with a quasi-experimental setup to analyze how small price differences impact people's choices," said Misra. "Studies addressing similar questions are often conducted with small, non-representative populations, often university students. What distinguishes our work is the real-world field setting covering sales across the US and observed over a long time period -- mimicking what a potential 'fat-tax' would look like and what the long term consumer choices would be," added Misra. "Our results have significant implications for health experts and policy makers, since interventions in the form of taxes on high calories foods are highly contentious," according to Vishal Singh of New York University. "The general perception is that these taxes need to be substantial, at least 20% and often as high as 50%, to have a meaningful impact. This would be highly regressive since low-income consumers spend a greater proportion of their disposable income on food. Here, we have compelling field-based evidence that such taxes don't need to be high to be effective," noted Singh. The study finds large shifts in demand toward the lower-calorie option are achieved with a price difference of just 5-10%. Consumers respond to small price incentives; and more importantly, low income consumers who are at higher risk for obesity are particularly responsive. The authors also examine implications of a fat-tax and the inherent trade-offs for different segments of society from such interventions: while there are economic losses from taxes to some segments, the health benefits from shifting to the lower calorie option outweighs these costs. The authors' recommendation is a selective taxation mechanism designed to induce substitution within a narrowly defined product category (e.g., baked versus fried chips), rather than to discourage consumption of the category as a whole. This has the additional advantage of mitigating the regressive nature of food taxes since some options within a narrowly defined product category can be made less expensive. Importantly, these taxes should be imposed as an excise tax so that they are reflected in the shelf price at the point-of-purchase, rather than imposed as a post-purchase sales tax where they become less salient in the decision process."

Their findings that even a marginal increase in the sticker price for a higher fat content milk produced a significant shift in the purchasing pattern with people preferring to buy lower calorie milk costing less. In other words it is not necessary to increase the price very high as is being considered by food market gurus and according to the authors of the above study a difference of 10-12% can achieve a significant shift away from the high fat milk. Probably this may be true considering the experience of tobacco and spirits industries where prices were increased exorbitantly through imposition of punitive taxes with the avowed purpose of  dissuading the buyers from buying these products. Neither cigarettes nor spirits have disappeared from the market though their sales must have dipped somewhat. Obviously making high calorie foods marginally dearer can achieve the desired results while there will be less opposition from the industry to such a move. It for the policy makers to ponder over it and orchestrate appropriate policy changes to reduce consumption of high calorie foods or high salt foods in order to improve the health of the population. 


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