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Abstract

This paper applies the Becker-Murphy (1988) theory of rational addiction to the case of carbonated soft drinks, using a time-varying parameter model and scanner data from 46 U.S. cities. Empirical results provide strong evidence that carbonated soft drinks are rationally addictive, thus opening the door to taxation and regulation. Taking rational addition into account, estimated demand elasticities are much lower than previous estimates using scanner data.

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