Impact of Cost Shocks on Consumer Prices in Vertically‐Related Markets: The Case of The French Soft Drink Market

We develop a structural econometric model of the vertical contracts between soft drink manufacturers and retailers to assess the impact of taxes or changes in production costs on consumer prices. Using individual data on food purchases from a representative survey of 19,000 French households in 2005, we estimate consumer demand using a random utility approach. Among a set of possible vertical relationships, we select the model that best fits the data. We evaluate the pass‐through rate of changes in input costs (sugar) or of taxes and show that the industry over‐shifts cost changes or excise taxes to the consumers. This result challenges the belief that firms do not pass on the full extent of cost changes or excise taxes to consumers.