Abstract
This article provides empirical evidence that the demand for ethyl alcohol in Lithuania is price elastic and the root cause of this elasticity is the competition between Lithuanian and Polish sellers. The basis for the emergence of competition lies in the price differences between the countries, which arise as a direct consequence of the Lithuanian government’s policy in the alcohol sector, which is directed towards reckless increases in excise duties. The increase in Lithuanian excise duties leads to a wider price gap between countries and in the first months after the increase results increases in prices. In subsequent months, Lithuanian importers and manufacturers tend to revise the assortment and costs, replacing more expensive goods with cheaper ones or slightly alter the markups. These changes are the main reason why demand in the domestic market gradually recovers. The price elasticity of demand predetermines the gradual recovery of the ethyl alcohol market, but each increase in excise duty reduces the manufacturers’ markups and (or) leads to the changes in product range, where higher-costs products are displaced by lower-cost products.
Highlights
Taxes affect prices, but the majority of taxes have an indirect effect on prices
The estimates reveal that under this setting, alcohol demand responds to the changes in the price gap between Poland and Lithuania and to the overall growth rate of liquor prices observed in Lithuania
In order to offset the losses from the diminished demand, producers and importers of liquor will lower the costs and revise the assortment of goods, replacing more expensive goods and ingredients with cheaper ones
Summary
But the majority of taxes have an indirect effect on prices. Despite being indirect, these effects sometimes can be traced out, e.g., whether the increase in corporate taxes is in any direct way related to pricing policies, but this increase may lead to the revision of markup. The price, which is set for a particular period and is usually set ahead, depends not on actual, but on the expected sales and so on the expectsed costs per unit of production Ct*, so that: Pt = Ct*μtτ e,t (4) In this function, price is the product of expected costs of goods sold, of a markup and excise tax factor τe,t. The difference between actual costs and their expected level should be minor under normal conditions, as the majority of producers know the prices of raw materials quite well and they usually set the price taking into account minor, unexpected changes or fluctuations in labour, capital, or goods markets. Costs determine the main features of a product, they determine the price level, the demand, and so on
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