I would if I could: Passing through VAT reductions in the german rail industry

Abstract

Germany’s state-owned train operator Deutsche Bahn made a credible pledge to completely pass through a VAT reduction to passengers. Using a price observation dataset, we find that pass-through rates for fixed-price tickets are indeed 100%, whereas pass-through rates for tickets with revenue-management-based prices can differ significantly from 100%. They vary over purchase-timing periods, departure weekdays, departure timeframes, and price levels, thereby indicating that revenue management systems can cause unequal pass-through to different customer groups. We also provide theoretical insights into the price-setting considerations of offering these two ticket types, and derive the monopoly pass-through rate for ad valorem taxes.