The effect of cigarette prices on brand-switching in China: a longitudinal analysis of data from the ITC China Survey

Abstract

Background Recent studies have found that Chinese smokers are relatively unresponsive to cigarette prices. As the Chinese government contemplates higher tobacco taxes, it is important to understand the reasons for this low response. One possible explanation is that smokers buffer themselves from rising cigarette prices by switching to cheaper cigarette brands. Objective This study examines how cigarette prices influence consumers’ choices of cigarette brands in China. Methods This study uses panel data from the first three waves of the International Tobacco Control China Survey, drawn from six large cities in China and collected between 2006 and 2009. The study sample includes 3477 smokers who are present in at least two waves (8552 person-years). Cigarette brands are sorted by price into four tiers, using excise tax categories to determine the cut-off for each tier. The analysis relies on a conditional logit model to identify the relationship between price and brand choice. Findings Overall, 38% of smokers switched price tiers from one wave to the next. A ¥1 change in the price of cigarettes alters the tier choice of 4–7% of smokers. Restricting the sample to those who chose each given tier at baseline, a ¥1 increase in price in a given tier would decrease the share choosing that tier by 4% for Tier 1 and 1–2% for Tiers 2 and 3. Conclusions China's large price spread across cigarette brands appears to alter the brand selection of some consumers, especially smokers of cheaper brands. Tobacco pricing and tax policy can influence consumers’ incentives to switch brands. In particular, whereas ad valorem taxes in a tiered pricing system like China's encourage trading down, specific excise taxes discourage the practice.

The heterogeneous effects of cigarette prices on brand choice in China: implications for tobacco control policy

“…A carefully designed tax reform, namely one that discourages brand switching, holds promise for decreasing cigarette consumption among low-SES smokers, rather than shouldering them with a greater financial burden. As we have also argued in previous work,3 an increase in ad valorem tax rates, imposed as a percentage of price, would further amplify the cigarette price spread, creating more incentives for smokers to trade down to cheaper cigarettes. By contrast, a specific excise tax, a fixed amount per unit, would reduce differences in relative tier prices, thereby discouraging down-trading.…”

“…To the extent that smokers may switch brands within a given tier, our results may still underestimate the true extent of brand-switching among Chinese smokers 3. However, since the three lowest tiers in our classification in which smokers are more sensitive to price all have reasonably narrow price ranges (approximately ¥3, or $0.5), it is unlikely that our method would severely underestimate the magnitude of brand-switching, especially for low-income and less educated smokers who are much more likely to consume cigarettes in one of the three lowest tiers.…”

“…A specific excise tax is the preferred policy instrument for curbing brand switching, yet China's current excise tax is an insignificant ¥0.06 ($0.01) per pack. The overall tobacco tax rate in China is only 40–46% of retail prices, far below the WHO standard of 70% 3. Hence there is ample scope for China to raise its specific excise tax on tobacco.…”

“…In an earlier paper using several waves of the ITC (International Tobacco Control) China Survey data, we addressed the effect of cigarette prices on brand switching among the entire smoking population and found the magnitude of switching to be moderate but non-trivial: a ¥1 change in the price of cigarettes alters the tier choice of 4–7% of smokers, depending on the starting tier 3. However, we did not examine the possible differential effects of price changes among different socioeconomic groups of the population, which is particularly important for policymakers concerned about the relative financial burden of increased taxes on low-income smokers.…”

Differential responsiveness to cigarette price by education and income among adult urban Chinese smokers: findings from the ITC China Survey

“…If low-income smokers respond to a price increase primarily through quitting rather than cutting down cigarette consumption, by only looking at those who continue to smoke after the price increase, our analyses left out those who quit smoking and hence underestimated the true impact of a price increase on low-income smokers. Second, two recent studies have shown that low-income Chinese smokers are more likely to engage in behaviours that reduce the price paid for purchasing cigarettes, such as switching to a cheaper brand 19 21. Brand switching can enable low-income smokers to maintain the same level of consumption, even when the average cigarette price increases.…”