Product reformulation with endogenous unobservables: Evidence from the soft drinks industry levy in the UK

Abstract

I study the impact of product reformulation on product entry and exit. Particularly, I study firms’ responses to the introduction of the UK’s sugar-content based Soft Drinks Industry Levy. This tax led firms to reformulate up to 80% of their product portfolios, reducing sugar content and potentially altering its taste - a dimension crucial for consumers but difficult to measure. To address the correlation between sugar and this endogenous unobserved characteristic, I use an adaptation of the interactive fixed effects estimator to the random coefficients model by Moon et al. (2018). Preliminary results suggest that ignoring this endogeneity across characteristics leads to an overestimation of consumers’ price elasticities and biased estimates.

Javier Boncompte

Economics PhD Candidate

I am an Economics PhD candidate at University College London. My research interests lie in Industrial Organization and Applied Economics, with a focus on studying how firms compete in the product space and their growth dynamics. I am affiliated with the Centre for Microdata Methods and Practice (CEMMAP) at the Institute for Fiscal Studies (IFS).