Investigating Firm-Level Strategic Responses to VAT Reform in Animal and Plant-Based Protein Markets - Discussion paper

Abstract This paper analyses the effects of a reduction in the value-added tax (VAT) rate on plant-based milk products in the Italian retail market, to assess the role of producers’ strategic behaviour in shaping the expected outcomes of policies designed to encourage more sustainable food consumption patterns. We use CIRCANA retail scanner data of food purchases in all supermarkets and hypermarkets in Italy over a five-year period (March 2021-February 2026) to estimate demand for ultra-high temperature (UHT) milk and related plant-based substitutes through the random coefficient logit demand model approach (Berry et al., 1995; Nevo, 2000). Under the assumptions of a pure-strategy Nash-Bertrand equilibrium, the estimated demand parameters are used to recover the mark-up and marginal costs for each product. The demand and supply-side parameters are then employed to carry out a counterfactual simulation in which we assume the VAT rate on plant-based milk to be lowered from 22% to 10%. The results from our counterfactual simulation show that prices of all plant-based products would fall substantially after the VAT reform (from 11.6% to 15.7%) with a consequent increase in their market shares (from 21.1% to 31.6%). However, mixed results are found in terms of producers’ strategic pricing reaction, with evidence of near-full price transmission in some cases, but more predominantly of partial price transmission of the VAT reduction to consumer prices. Overall, our findings stress the importance of accounting for strategic pricing behaviour along the agri-food supply chain for ex-ante evaluation of policy outcomes. Keywords: animal protein, plant-based protein, VAT reform, price-transmission, firm-strategic behaviour / JEL codes: H32, L13, Q18 The findings presented in this report are preliminary and should not be circulated or cited without the authors’ permission. They remain subject to revision as the work progresses towards an academic publication. Citation Tiboldo, G., MORO, D., Stamadianos, K., SCKOKAI, P., Iuffmann Ghezzi, A., Fornari, E., & CASTELLARI, E. (2026). Investigating Firm-Level Strategic Responses to VAT Reform in Animal and Plant-Based Protein Markets - Discussion paper (Version v01). BrightSpace Horizon Europe project Grant Agreement No. 101060075. https://doi.org/10.5281/zenodo.19699301----------------- Funding acknowledgement Funded by the European Union. Grant Agreement No. 101060075. Views and opinions expressed are those of the authors only and do not necessarily reflect those of the European Union or the European Commission. Neither the European Union nor the granting authority can be held responsible for them. Legal notice This document was produced under the terms and conditions of Grant Agreement No. 101060075 for the European Commission. It does not necessary reflect the view of the European Union and in no way anticipates the Commission’s future policy in this area. The European Commission is not liable for any consequence stemming from the reuse of this publication. © BrightSpace, 2026 The reuse of this document is authorised under a Creative Commons Attribution 4.0 International (CCBY 4.0) licence (https://creativecommons.org/licenses/by/4.0/). This means that reuse is allowed provided appropriate credit is given and any changes are indicated. For any use or reproduction of elements that are not owned by the BrightSpace consortium, permission may need to be sought directly from the respective right holders. Project information BrightSpace Horizon Europe project Grant Agreement No. 101060075 https://cordis.europa.eu/project/id/101060075 CALL: Innovative governance, environmental observations and digital solutions in support of the Green Deal WORK PROGRAMME Topic ID: HORIZON-CL6-2021-GOVERNANCE-01-12 EU agriculture within a safe and just operating space and planetary boundaries BrightSpace Project coordination: Wageningen Economic Research, The Hague, NL Contact: brightspace.wser@wur.nl | Website: www.brightspace-project.eu Project duration: 1 November 2022 – 31 October 2027.