The impact of prices on alcoholic beverage consumption in Chile

Abstract

Introduction and objectiveChile is among the countries with the highest alcohol consumption per capita in Latin America, but little has been done in the way of public policy and policy research to overcome this problem. The objective of the present study is to estimate demand elasticities (own-price, cross-price, expenditure and quality) for three groups of alcoholic beverages in Chile: spirits, wines, and beers.Data and methodsThe study uses data from the VII Encuesta de Presupuestos Familiares (Family Budget Survey) 2011–2012 conducted by the National Institute of Statistics. Because of problems with the quality of the measurement units, hot-deck imputation method was used with the alcohol purchases that presented problems. To estimate the demand elasticities, the Almost Ideal Demand System (AIDS) method proposed by Deaton was used. Quality decisions were estimated for each beverage separately using an equation proposed by Deaton in the three-step AIDS.ResultsThe estimated elasticities were more inelastic for spirits (-0.14, P<0.01), followed by wines (-0.77, P<0.01) and beers (-0.93, P<0.01). Spirits reported less sensitivity to changes in the total budget, while wines reported the most sensitivity to changes in the total budget (expenditure elasticity). Wines also reported the most sensitivity related to quality for changes in the total budget (0,20, meaning that a 10% increase in a household’s total expenditure increases the “quality” of purchased wines by 2%).ConclusionsOwn-price elasticities reported for spirits, wines and beers are consistently negative, and inelastic, in line with international evidence. Although own-price elasticities for spirits is more inelastic than found in most studies, its quality-elasticity is more positive and greater. This could be explained by the greater price dispersion of spirits, as well as spirits (and wine) being consumed more than beers in Chile. This in turn may be because consumers have the option of switching to cheaper, Chilean-produced spirits such as pisco and wines when prices rise. The existence of these relatively broad quality-elasticities points to the need for a change in the alcohol tax structure from the current ad-valorem tax to a specific tax that could reduce price dispersion and curb total consumption.

Impact of Taxation Policy on Household Spirit Consumption and Public-Finance Sustainability

“…When it comes to about which data policymakers should be cautious, income elasticity of 0.26 implies that an income increase of 10% increases consumption by 2.6%. Estimated results are in accordance with the results obtained in other similar studies in LMICs [42,43]. This result tells us that a living-standard increase could, to some extent, neutralize the impact of excise-tax increases, an important factor that should be taken into consideration in strategic planning of alcohol-tax policy.…”

“…Generally, according to the available evidence, it was concluded that systemwide estimations that include Deaton's model were set to conditional framework elasticity estimation. On the other hand, studies that deal with elasticity estimation in unconditional frameworks showed that those estimates are higher (mostly twice) in absolute values compared to conditional estimates [14,38,42,43,45,46].…”

“…From the above results, we could conclude that higher alcohol expenditure could potentially lead to a decrease in expenditure on other necessary goods and services. It is especially important to be aware of the crowding-out effect of spirit spending in the long term in LMICs due to its negative influence on households' already vulnerable situation [13,42,53].…”

“…All studies showed that demand for spirits is generally more responsive to price, compared to wine and beer in both highand LMICs. However, one should take into account that these results vary in the case of different applied methodologies, as well as in cultural differences in drinking preferences [42][43][44][45][46].…”

State or market? How to effectively decrease alcohol-related crash fatalities and injuries

“…For instance, there were no changes to the minimum legal age to drink, restriction on advertising, promotion or sponsorship by producers of alcohol, minimum prices or sales restrictions related to prices of alcohol products, or taxes on alcohol-related products. 22 In Chile prior to 2014, taxi transport services were exclusively provided by private companies registered in the Ministry of Transports and Telecommunications. During 2014, this service offered more than 265 million trips in Chile's capital city Santiago, and the number of taxis offering this service in Santiago, Valparaíso-Viña del Mar and Concepción was approximately 37 000.…”