The implications of heterogeneous habit in consumer beverage purchases on soda and sin taxes

Abstract

In this article, we study the heterogeneity of habit strength in households’ demand for regular carbonated sweetened beverages (CSBs) and beer in the United States. A demand model that nests a smooth transition function is used to describe habit-based consumption patterns, revealing heterogeneous strengths of habits among households. We find that more habitual consumers, those with a strong preference for a particular product, are not as sensitive to price or expenditure as the aggregate population. This finding is further supported by simulations of the potential effects of soda and beer taxes. We find the aggregate response to soda and beer taxes is smaller than when the influence of habit is assumed to be homogeneous.