How Do Smokers Respond to Cigarette Taxes? Evidence from China's Cigarette Industry

Abstract

This paper examines how Chinese smokers respond to tax-driven cigarette price increases by estimating a discrete choice model of demand for differentiated products, using annual nationwide brand-level cigarette sales data in China from 2005 to 2010. We allow for substitution between different cigarette brands and also incorporate key features of rational addiction theory into the model. Results show that the average own-price elasticity of demand for cigarettes at the brand level is -0.807, and the overall price elasticity of cigarettes at the market level is -0.488 in China. We find tax-induced substitution toward low-price cigarettes as well as high-tar cigarettes and that tax hikes encourage within-class substitution more than across-class substitution. These results have important policy implications for the potential effects of cigarette taxation. Copyright © 2014 John Wiley & Sons, Ltd.

Early assessment of China’s 2015 tobacco tax increase

“…For example, recent studies have found that the price elasticity of demand for cigarettes in China is around −0.5 27 , 28 . This is similar to estimates from other developing countries, meaning that a 10% increase in the price of cigarettes will reduce cigarette consumption by 5% 29 .…”

Analysis of Tobacco Price Elasticity in Albania Using Household Level Data

“…This contrast supports the view that price elasticity may be country specific e.g., due to the market structure, patterns of consumption, and government role and associated policies [12][13][14][15][16]. For instance, some authors of studies in developing countries, Kenkel et al [17], Lance et al [18], and Liu et al [10] find weak evidence of tax or price effect on tobacco demand. In addition to these studies Ross et al [19] found that this trend might derive from the wide range of cigarette prices available on the market, high social acceptability of smoking, and stockpiling effects.…”

“…Furthermore, the lack of data availability on the age and gender of tobacco users, due to lack of individual data, does not allow us to estimate price elasticity by age or gender. Elasticity coefficients differ in terms of age, gender and incomes, time observed, and brands [10,38]. The youth in several low-income countries is found to be more responsive to cigarette price changes than other age cohorts [39,40].…”

“…The positive impact of taxes on reducing tobacco consumption has been confirmed in several empirical studies on developed and developing countries [7][8][9][10][11]. Eozenou and Fishburn [8] argue that an increase in the price of cigarettes, irrespective of the level of income, would both prevent individuals from starting the use of tobacco and cause smokers to quit smoking.…”

“…In developing countries, the evidence of consumer responses to price increases differs between countries. A review of studies estimating price elasticity for tobacco has shown there is a diversity of evidence reflecting whether the elasticity is higher [9] or lower in developing countries [10,11] compared to developed countries. This contrast supports the view that price elasticity may be country specific e.g., due to the market structure, patterns of consumption, and government role and associated policies [12][13][14][15][16].…”