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Sep 23, 2020 Business Administration Faculty Research in Education

New research adds “weight” to the vice tax debate

Smoking. Gambling. Drinking. For years, certain activities have been the subject of vice taxes designed to curb their appeal and mitigate their societal effects. Now with increased attention on healthy living, new enemies of public health have been added to the list, including sugary soft drinks and foods that are high in fat and sodium. But can this new breed of “sin taxes” actually reshape the buying habits — and waistlines — of consumers who really like their sweets? The answer, according to assistant professor Ying Bao, could depend on where your waistline actually begins.

By linking body mass index with actual supermarket purchases, Bao was able to observe how purchases differed across obesity levels and food categories. “What we found is kind of interesting,” said Bao. “First, consumers with higher BMIs consume more vice products. That was not surprising. But what we found interesting was that they are more price-sensitive to those products compared to consumers with lower BMIs. We didn’t find any evidence of this in the comparable category.”

In other words, says Bao, when price goes down, we will all buy more. However, consumers with higher BMIs are even more likely to buy compared to those with lower BMIs. While this could support the idea that taxing unhealthy foods could lead to lower consumption, Bao says more research is needed to determine which categories should be taxed and what tax levels could be most effective.

Bao’s interest in consumer behavior and quantitative marketing started at the University of Toronto. Originally from China, Bao moved to Canada to pursue a degree in economics. But during her master’s studies, she became fascinated by the role psychology plays in purchase decisions. So, she decided to pursue a PhD in marketing at the Rotman School of Management, which led to several working papers on the topic.

One of those papers was inspired by an overdraft fee Bao received from her bank. Penalty fees, which can be hefty, are great for banks who enjoy the extra revenue, but frustrating for consumers who are increasingly turning to money management apps like NerdWallet to avoid them. Bao wondered if those apps made a difference. Her analysis showed that consumption tracking apps could help customers, either directly by letting them know when they might incur a fee or indirectly by forcing firms to reduce penalties to disincentivize consumers from using the apps.

“With that said, our analysis reveals the conditions under which consumption tracking can compel a firm to create a penalty fee that would not otherwise exist” said Bao. “Moreover, advances in consumption tracking can actually lead to higher profits and lower consumer surplus if consumers are “mostly sophisticated” about their forgetfulness.” In this case, says Bao, firms could strategically sets penalty fees at a level that fosters a false sense of security, whereby consumers expect to use consumption tracking, but ultimately decide not to bother, making them more susceptible to penalty fees.

Bao, who will teaching a new marketing course in consumer analytics in the spring, says she was excited just to interview at Gies. “I told them it was my dream school,” said Bao who was impressed by the opportunities it offered. As someone who grew up in a more rural area, she also liked the size of the community and its reputation for friendliness.

With its focus on quantitative marketing and consumer behavior, the new analytics course seems custom-made for Bao, who hopes to give her students both a practical knowledge of those subjects and the hands-on skills they need to develop a competitive edge.