Price Setting Rules, Rounding Tax, and Inattention Penalty

TL;DR

This study evaluates Israel's price rounding regulation, finding it eliminated the rounding tax but increased consumer costs due to retailer inattention, highlighting unintended negative effects of the policy.

Contribution

It provides empirical evidence on the effects of price rounding regulation on consumer costs and retailer behavior in Israel's fast-moving consumer goods sector.

Findings

Rounding tax was eliminated by the regulation.

Consumers paid more due to retailer inattention.

Policy had unintended negative consequences.

Abstract

We study the price rounding regulation in Israel, which outlawed non-0-ending prices, forcing retailers to round 9 ending prices, which in many stores, comprised more than 60 percent of all prices. The goal of the regulation was to eliminate the rounding tax, the extra amount consumers paid because of price rounding, which was necessitated by the abolition of low denomination coins, and the inattention tax, the extra amount consumers paid the retailers because of their inattention to the prices rightmost digits. Using 4 different datasets, we assess the success of the government in achieving these goals, focusing on fast moving consumer goods, a category of products strongly affected by the price rounding regulation. We focus on the response of the retailers to the price rounding regulation and find that although the government succeeded in eliminating the rounding tax, the bottom line is that shoppers end up paying more, not less, because of the regulation, underscoring, once again, the warning of Milton Friedman that policies should be judged by their results, not by their intentions.