Are Tax-Free Wine Prices Attractive for Consumers? Empirical Evidence from Norway

Jan Bentzen,Valdemar Smith

doi:10.5539/ibr.v13n7p130

Abstract

Wine is highly taxed in Norway, but there is a Norwegian island, Svalbard, with no taxes at all. For the purpose of comparing wine prices, with a focus on tax-free prices, we have collected a data set with identical wines from the two parts of Norway. At the retail level wines are only sold at state monopoly shops in mainland Norway and information from these allows a calculation of the before-tax prices in the country. The prices at the tax-free shop on Svalbard are significantly higher than the pre-tax prices and thus some monopoly price setting is taking place in the tax-free shop. Like in the present case duty-free shops often attract consumers with &lsquo;tax-free&rsquo; prices, but some surplus is still extracted from the customers due to a monopoly behavior.

Highlights

Consumers often associate tax-free prices with making a good deal, and people believe that prices on e.g. perfume, spirits, cameras, or even clothing are relatively cheap in duty-free areas such as international airports
The aim of this paper is to contribute to the ongoing discussion of whether tax-free prices are lower than ordinary retail prices outside the tax-free shops
Using wine price data for mainland Norway and for the tax-free island Svalbard, we found that the retail prices are lower on Svalbard

Summary

Introduction

Consumers often associate tax-free prices with making a good deal, and people believe that prices on e.g. perfume, spirits, cameras, or even clothing are relatively cheap in duty-free areas such as international airports. Travelers at airports may be aware that the same goods can be purchased at competitive prices outside the tax-free airport shop Still, these shops attract lots of travelers, and waiting time for the flight departure is often used for shopping activities. These shops attract lots of travelers, and waiting time for the flight departure is often used for shopping activities It is debatable whether tax-free prices at airports really are competitive or even comparable with the regular retail prices. Svalbard is totally separated from the rest of Norway, and alcohol sales take place at a single shop called Nordpolet (in English: The North Pole) This shop has the sole license – like Vinmonopolet in mainland Norway - to sell alcohol, and the market is an example of a virtual monopoly. This allows us to make an analysis of whether some kind of monopoly behavior exists and whether tax-free prices really correspond to the before-tax prices

Data and Pricing Behavior

Price Comparisons and Correlations

The Markup on Wine Prices – Do High Tax-Free Prices Make Sense?

Findings

Concluding Remarks