Econometric Modelling of Price Response by Alcohol Types to Inform Alcohol Tax Policies

The paper presents estimates of price elasticities of demand for twelve disaggregated alcohol beverages in Australia: premium beer, full strength beer, low alcohol beer, and mid strength beer; red bottled wine, white bottled wine, sparkling wine, cask wine, and dark and light ready-to-drink (RTD); and dark and light spirits. These disaggregated categories correspond closely to the commodities of interest to public policymakers with respect to taxation and health policies. The system of demand equations is estimated with Nielsen data from Australia using the semiflexible AIDS model in order to impose negative semidefiniteness on the demand parameters. Results indicate elastic own-price elasticities for virtually all commodities. Morishma elasticities of substitution indicate premium beer, mid strength beer, and cask wine exhibit the largest elasticities of substitution. Low alcohol beer, light RTD, and light spirits show the lowest substitution. The elasticity estimates are used to illustrate the effect of a change in the current tax system toward taxation equalisation based on alcohol content. The policy simulation highlights the importance of having a complete system of demand elasticities because the mix of consumption of alcohol beverages changes in response to the type of alcohol policy.