A fundamental building block of economic theory is the fact that increasing (or decreasing) the price of a commodity reduces (or increases) demand for that commodity. Price elasticity of demand refers to the extent to which use of a product falls or rises after increases or decreases in its price. If price elasticity of demand for a product were very low—that is, if it were inelastic—then demand would fall or rise only slightly in response to price changes. For instance, if price elasticity for a particular good were about –0.1, then demand for that good would fall by only 0.1% for every 1% increase in price. Demand would fall by 1% for a 10% increase in price, by 2% for a 20% price increase and so on. Demand for a good with high price elasticity would fall much more sharply in response to price increases. If price elasticity of demand for a good were about –1.0, then demand for that good would fall by 1% for every 1% increase in price. Demand would fall by 10% for a 10% price increase, 20% for a 20% price increase, 100% for a 100% price increase, and so on.
While demand for tobacco products is not as elastic as demand for many other consumer products 1 research has consistently demonstrated that increases in the price of tobacco products are followed by moderate falls in both the percentage of people smoking and the amount or number of tobacco products that remaining smokers consume. 2 , 3 The percentage of people smoking declines because tax increases discourage non-users from starting, encourage current users to quit and, also very importantly, discourage former smokers from starting again. 3 Because increases in tobacco taxes result in higher tobacco prices across the whole population, the effect of even small resulting reductions in tobacco use can be very large across the whole population.
13.1.1 Estimates of elasticity
Why people reduce smoking in response to increases in the price of tobacco products has been a matter of some conjecture—see Section 13.2. However, there is no doubt that they do. The extent to which demand for tobacco products responds to changes in price is an empirical question, the answer to which can be ascertained by measuring trends in consumption as prices and other relevant factors change.
Depending on the size of the price increase, reduced consumption of tobacco products following increases in tobacco taxes can be quite substantial. In 1999, a World Bank review concluded that, all else being equal, price rises of about 10% would on average reduce tobacco consumption by about 4% in developed countries and about 8% in developing countries. 4, 5 In their 2003 meta-analysis reviewing 86 studies published to the year 2001 which examined the price elasticity of demand for tobacco products, Gallet and List 6 found a mean price elasticity of –0.48, meaning that, on average, a 10% increase in price will be followed by a decrease in consumption of 4.8%.
The review conducted by the International Agency for Research on Cancer published in 2011 concluded that studies on the impact of price increases on aggregate demand in high income countries on average find price elasticity of about–0.4, with most estimates from the US and UK falling in a relatively narrow range between–0.2 and –0.6. 7
13.1.2 Various methods of measuring elasticity
Price elasticity can be calculated in many different ways, and various methods have different advantages and different problems (see Section 13.1.6).
Many studies examining the price elasticity of demand have used aggregate data—that is, data at a country or state level on the total amount of tobacco purchased or taxed for the entire population. Some of these studies have analysed changes in taxable or reported sales of all tobacco products, and some have looked at cigarettes alone. Some have measured the weight of product sold, others the number of units. Some studies have compared consumption in the same jurisdiction with different prices over time (time-series analyses). Others have compared consumption in jurisdictions with different prices at the same points in time (cross-sectional studies).
Other studies make use of surveys conducted regularly among school students, adults or households. These might be surveys that ask about smoking habits or they might be surveys about spending on a whole range of household items. i A small number of studies have looked at consumption as reported by a panel of smokers interviewed (about their consumption and various factors which might affect it) before and after tax increases over time. More recently, behavioural economists have examined the response of individuals not to real-life price increases, but rather to price increases simulated in behavioural thought experiments.
Researchers have also used a variety of statistical models for specifying demand and for estimating elasticity. In their comprehensive review, Gallet and List 6 found that resulting estimates of price elasticity from all these sorts of studies were generally fairly similar and did not differ systematically depending on the design or method of analysis used. Studies that measured responses to price changes in the short term tended to report lower elasticity than studies that reported long-run estimates (–0.40 compared with –0.44). Subsequent studies in high-quality journals also tend to report slightly lower estimates, reflecting increasing sophistication in modelling and the greater number of factors also affecting consumption being taken into account. 6
13.1.3 Impact of price increases on uptake, continued consumption and quitting
Data from surveys of individuals across a population allow researchers to examine in more detail the impact of price increases on both smoking participation (that is, whether people smoke at all) and smoking intensity (that is, how much people smoke). Different studies have drawn differing conclusions about the relative contribution of declines in prevalence and declines in smoking intensity. 8 ii
Overall, research among adults 8 indicates that:
- Roughly half of the impact of price on tobacco consumption results from reductions in prevalence, and roughly half results from remaining smokers smoking less frequently.
- Higher prices prevalence by increasing interest in quitting, quit attempts and successful cessation
- Higher prices can reduce consumption among remaining smokers by reducing consumption by daily smokers.Prices can reduce consumption by increasing the likelihood that smokers will smoke only on some days. 8
Unlike for adults where prices affect both participation and intensity, early researchers assumed that most of the effects of price on young people smoking were on participation, mostly by reducing smoking initiation. Studies examining the relative effects of price on participation and smoking intensity among youth have reached varying conclusions, 9, 10 but those that have used the longest panels of data 11, 12 have generally been able to detect some effect on both initiation and quitting. 13 The review of the literature conducted by the International Agency for Research on Cancer 3 concluded the following:
- Cigarette prices influence different stages of uptake of cigarette use, with a relatively larger impact at later stages.
- Most but not all longitudinal studies from high-income countries find that smoking initiation is inversely related to price.
- As cigarette prices increases, smoking cessation among young people increases.
- Price has a direct effect on young people, and also an indirect effect through both peer and family influence. 9
13.1.4 Price sensitivity among various population groups
Studies collecting data from individuals also allow researchers to assess how different population groups tend to respond to changes in price. 14
Since young adults more commonly than older adults are occasional rather than regular smokers, it is theoretically possible that they may be less influenced by price changes. However, teenage and younger smokers generally earn lower wages and are less dependent on tobacco, both of which would tend to make them more price sensitive. 15 Early cigarette demand studies by Lewit and colleagues using individual-level data 16, 17 found a strong inverse relationship between price sensitivity and age, with younger smokers reducing consumption much more than adults in response to the same price increases. This finding was thrown into doubt by an influential Rand study by Wasserman and colleagues in 1991. 18 Later studies however 11, 12, 19, 20 supported earlier conclusions of Lewit and colleagues that younger smokers tend to be more price sensitive.
In the US Surgeon General’s review of the literature published in 1994, 21 estimates of elasticity of youth cigarette demand ranged from –0.9 to –1.5 (about three times the level of elasticity of adult cigarette demand). Across all the studies published up until 2001, Gallet and List also found greater responsiveness among younger people, with an average price elasticity of –1.43 for teenagers, –0.76 for young adults, and –0.32 for adults. 6
A comprehensive review of literature on the effect of prices on youth smoking conducted by the International Agency for Research on Cancer 9 concluded that price elasticity of demand for teenagers was somewhere between –0.5 and –1.2%. 9
Studies have differed as to findings about the relative price sensitivity of women compared with that of men. Townsend and colleagues (1994) found that women in the late 1980s and early 1990s in Britain were more sensitive than men to increases in tobacco prices. Chaloupka and Pacula, 22 however, found that the prevalence elasticity iii for young American men was almost twice as large as that for young women. Across all the studies published until 2001, Gallet and List 6 found an average price sensitivity of –0.50 for men, and –0.34 for women. Subsequent studies have generally failed to find gender differences in price sensitivity. 8 iv
Studies in high-income counties have also tended to show greater price sensitivity among lower socio-economic groups. 23 Low-income groups were more responsive to increases in cigarette prices in the UK in the 1980s and early 1990s. 24 , 25 , 26 In the US, smoking rates of young black men are significantly more responsive to changes in price than are smoking rates among young white men. 27
While not every study has reached the same conclusion—different levels of access to cheaper tobacco products over time and in different countries may explain some of the inconsistent findings 28 —the majority of studies in high-income countries have found greater price sensitivity among those on lower incomes. 23 , 28 See Section 13.11 for further details.
Smokers in poorer nations also tend to be more sensitive to price, with estimates of price sensitivity generally around 0.8%, about double that in more affluent countries. 29 Blecher and Walbeek conclude, however, that when changes in affordability rather than changes in price are taken into account, the level of sensitivity in developing countries may be similar to that observed in developed countries. 30
13.1.5 Price elasticity for tobacco products other than cigarettes
US, 31 Canadian 32 and Finnish 33 research has concluded that an increase in the price of manufactured cigarettes can lead to an increase in sales of loose tobacco and other tobacco products. Increases in the price of those products without simultaneous increases in the price of cigarettes are also followed by drops in consumption. 33 In Australia, use of roll-your-own tobacco has increased in the years following substantial increases in tax levels on all tobacco products, and additional increases on RYO tobacco (see Section 2.5 and Section 13.6). Increases in use of roll-your-own have been even more pronounced in countries where taxes on loose tobacco have not kept pace with taxes on cigarettes. 34
13.1.6 Limitations of studies assessing price sensitivity
There is no doubt that smokers are responsive to changes in the price of tobacco products. However there is no single definitive way of quantifying price sensitivity. Studies that use individual-level data and those that use aggregate data are both subject to various limitations.
The reliability of individual-level data is very much dependent on adequate sampling and recall and honesty by respondents about factors such as purchase of illicit tobacco. Under-reporting of numbers of cigarettes (or amount of other tobacco products) smoked is also a significant problem. 35 Using aggregate data on taxable product sales avoids these problems and ensures that researchers are looking at the impact of price changes on the entire market; however, studies that use such data are subject to a number of different limitations.
First, without asking a representative sample of consumers about the prices of the products they are able to buy over time, it is sometimes difficult to determine exactly what the average or typical price increase is (see Section 13.3). Manufacturers use a variety of methods of cushioning consumers from the effect of the increases in taxes. It is by no means straightforward to assess the extent of price increases across a market where retailers engage in various degrees of discounting, ‘specialling’ and bulk-selling and where illicit or tax-free tobacco products may also be available.
Specifying changing quantities of tobacco products is similarly not straightforward. Studies that measure the weight of product may not sufficiently account for tobacco companies gradually reducing the taxable weight of cigarettes (without corresponding decreases in delivery of toxins). 36 Studies that analyse changes in the number of products generally do not take into account any consumer shift to possibly more toxic tobacco products. 37
Finally, studies often do not adequately take into account all the less-easily-measured factors that affect tobacco consumption, such as negative (unpaid) publicity about tobacco in the media and anti-smoking sentiment in the community. Often changes in such factors coincide with or precede tax increases, and the effects of such factors may multiply rather than simply add to the effect of price increases. v
13.1.7 Concluding note
Despite debates on the finer points of theory and despite all these methodological limitations, there is no doubt that price exerts a profound impact on tobacco consumption. 3 Falls in consumption following large price increases are consistently much more rapid and more significant than falls following implementation of most other tobacco-control policies, and the World Bank has stated that increasing tobacco taxes is the single most effective measure that governments can take to reduce health burdens. 2 Increasing taxes on tobacco is a key plank in every major international tobacco-control strategy. 2 , 38 - 44
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