Soda Taxes versus Cup Sizes when the Retailer Practices Nonlinear Pricing: An Experiment

With Joe Balagtas and Steve Wu

Taxation and portion cap rules are alternative policies available to regulate the consumption of sugary drinks. We examine their impacts on consumer surplus and choice availability in an experimental market where sellers can practice second-degree price discrimination. In the laboratory, single-product sellers interacted with automated buyers with either low or high preference. Under a cap rule, sellers provided two options as frequently as in the control. With a tax, their pricing strategy excluded low-type buyers. Consumer surplus remained unaffected under a cap but was diminished under taxation. We conclude that taxation is not superior to quantity limits in setting with discrete buyer types and when consumer welfare and product availability are of primary concern.