Consumer Prices in German Food E‐Retailing: the Impact of the Value Added Tax Cut in 2020

Abstract

SummaryIn July 2020, the German government reduced the VAT rate for six months in order to stimulate private consumption and support the economy, which had been weakened by the Covid‐19 pandemic. It was crucial for the success of the tax cut that retailers passed it on to consumers by reducing retail prices. This article applies a fixed effects estimation model to analyse the price effects of the VAT reduction in grocery e‐retailing. It uses price data collected directly from the websites for major food categories of four food e‐retailers, Bringmeister, MyTime, Real and Rewe. The tax reduction overall was largely passed on to consumers by price reductions. However, the pass‐through rates, i.e. the extent to which the tax rate change was translated into lower prices, varied among the stores, ranging from 16 to 134 per cent, with the highest rate being for Bringmeister. The pass‐through rate for Rewe was 84 per cent. Also, the timing of the pass‐through varies. The highly divergent pass‐through rates were below the expectations of politicians and the announcements made in advance by food retailers, suggesting some strategic pricing within and between stores. For future VAT reduction initiatives, the results of this study and consumers' reactions to price changes should be considered in more detail in order to complete the assessment of the effectiveness of such measures.