Public policy in food markets: understanding advertising and choice inter-dependencies – PPFM (EST010223 1 EST010924 1)

We have produced a research paper presented in many seminars and conferences. The paper title is “Soda Taxes and Advertising Dynamics” co-authored by Rossi Abi Rafeh, Pierre Dubois, Martin O’Connell and Rachel Griffith. Rossi Abi-Rafeh has also produced an additional paper in his PhD dissertation on the pass-through of advertising prices on product prices. The research on fast food consumption is still in progress.
The most important work done for now is the paper “Soda Taxes and Advertising Dynamics”.
It is the first paper in the literature that model the impact of soda taxes on advertising strategies which is a very important determinant of consumption. Specifically, Soda taxes are commonly used to reduce sugar consumption. The effects of taxes on prices and consumption have been widely studied, however the impact of taxes on firms' strategic choices over advertising spending have not. We study how soda taxes affect both pricing and advertising strategies of firms in a dynamic oligopoly game. We use rich longitudinal data to estimate an equilibrium model of the cola market. We exploit the fact that firms delegate decisions over television advertising spots to agencies. This allows us to model the rich impacts of advertising on demand, while solving the otherwise intractable dynamic equilibrium impact of the introduction of a tax. We find that the dynamic competition game between the main players (Coca Cola and Pepsi) results in asymmetric responses in advertising spending, with Coca Cola reducing regular coke advertising expenditure in response to a sugary soda tax, while both Coca Cola and Pepsi only slightly change diet versions advertising. We find both firms’ profits decrease, while that consumers consumption of sugar decreases.

The new method developed allows to simulate the effect of soda taxes on both price sand advertising which is unknown as the dynamic simulation of the effect of taxes on advertising has never been done.
Our results show that the tax on sodas as implemented in the UK in 2018 should lead to a decrease of advertising of the main companies (Coca Cola and Pepsi) as predicted by the model.
This means that the effect of the taxes on the reduction of soda consumption is predicted to be larger than if we were accounting for price effects only.

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Across the OECD, more than one in two adults and one in six children are overweight or obese, with obesity rates predicted to rise in the coming years. Obesity and poor diet contribute to a range of health problems, which increases the burden on publicly provided health services. There are substantial inequalities in the prevalence of diet related disease; for example, less educated women are two to three times more likely to be overweight than those with more education.

This has led many governments to introduce fiscal and regulatory policies aimed at improving nutrition. Common policies include: taxes to raise the price of unhealthy food and drink; restricting what can be advertised and when; and limiting the availability of fast foods. There is a growing evidence base on the impacts of these forms of intervention, but it remains far from complete.

In order to determine which policies are likely to be effective, we need to understand how people choose what to eat and drink, and how firms set prices, advertising and their product offering. A key component of people's purchasing behaviour is how what they buy today is affected by what they bought yesterday, or whether they saw an advert for a product last week. This dependence in decisions and experiences across time affects not only how individuals select what to buy, but also how firms set prices and choose how to advertise. Jointly, these market interactions will determine the effects of any government intervention on what's bought, and therefore what's eaten, and, ultimately, on health outcomes.

Through this research we will develop methods to study these interactions, and we will apply the framework that we develop to two applications of topical policy interest.

First, how does advertising affect people's food and drink purchasing choices, and how does this affect how firms choose to advertise. Modelling these decisions is challenging because of the complex and dynamic nature of advertising. If someone sees an advert for a product last week, or last month, this could still affect their decision to buy today. How it affects their decision is also complicated - does an advert for Coca Cola lead them to buy a Coke rather than Pepsi, or does it make them more likely to purchase any soft drink? Firms' decisions about how to advertise are both complex and interact with each other. Our objective is to harness data and computational developments to extend the literature to allow us to model the complexity of advertising competition in food and drink markets. Once we have estimated how people respond to advertising and how firms advertise, we can use the model to simulate counterfactual policies. For example, what would be the effect on prices, purchases and advertising if there was a change in tax policy, or advertising of certain products is restricted? These are questions that are currently of high interest to policymakers.

Our second application is to study people's fast food purchases; consumption of food outside the home, and fast food in particular, is a substantial source of calories and has been linked to weight gain in children. Relatively little is known about people's patterns of fast food consumption, mainly due to a lack of data covering these choices. We aim to fill this gap by exploiting novel data on out-of-home purchases, which has the additional advantage that it is linked to the household's grocery purchases. This will allow us to study whether people with a strong preference for fast food, or who are particularly responsive to price or advertising, are also people from households that purchase many or nutritionally poor quality calories. This is crucial in determining the efficacy of targeting policy at fast food consumption and determining which type of policy to use.