What can (and can't) prices tell us about Cross-Border Shopping? Evidence from Argentina's gasoline market

• In Event: From Gas Tanks to the Grid: Impact of Taxation on Energy Consumption

Abstract

This paper documents and discuss the limits of relying only on prices to study and detect cross-border shopping (CBS) behavior, which occurs when consumers travel to a foreign jurisdiction to benefit from lower prices. A common and indirect test for detecting CBS is examining how firms pass through taxes heterogeneously depending on their location, as standard theory would predict lower pass-through in border regions competing with foreign jurisdictions. Exploiting a particular tax reform and using a panel on prices and quantities at the firm level, this paper documents evidence of significant CBS patterns but homogeneous pass-through with respect to the border. The reform extends a tax-exempt area in the retail gasoline market in Argentina, reducing the tax rate from 55% to 5%. The reform creates a geographical discontinuity, where demand at exempted stations increases by 10% immediately after the tax change, while setting prices 25% lower. In contrast, non-exempted stations (located near the tax border but not exempted) experienced a fall of 5% in demand, and there is no price reduction. Using geographic coordinates for each gas station, I find that the negative and positive effects on quantities diminish as stations are located farther from the border, consistent with CBS. However, prices remain homogeneous regardless of distance to the border. The results of this paper shed light on the discussion of the limits of relying on price data to analyze CBS in particular, and taxation in general.

Author

• Francisco Pizzi, fmpizzi@ucdavis.edu