Illicit Tobacco Demand

Congratulations to my RMIT colleagues Lisa Farrell and Tim Fry for winning the Economic Papers Best Paper Prize for 2013 for a paper entitled, “Is Illicit Tobacco Demand Sensitive to Relative Price?” (ungated version here).

First thing to note:

This research was funded under the Australian Research Council Discovery Grant DP0662751.

Second – why is the research important?

Tax and excise rises serve to increase the price of licit relative to illicit tobacco. Consequently there has been a rise in black market tobacco consumption. This paper investigates the degree of substitution between licit and illicit tobacco using novel survey data.

Then some of the results and conclusions:

One also sees that a critical point in these results is where those who report they would decrease their consumption in the illicit market is exceeded by the number of smokers who say they would increase their consumption in the illicit market. This point occurs at a price ratio of 1:2.50 (switch point A). This point is below the current price ratio of 1:3 and suggests that further increases in the price ratio will serve to increase the consumption of illicit tobacco by current users.

In summary, this shows that further increases in the price ratio will lead to an increase in the demand for illicit tobacco from this group. From a policy perspective these findings are especially interesting. The current policy climate in Australian remains actively anti-smoking and further tax increases for the licit market have been announced since our survey. Indeed, the expected price rises in the formal sector will soon take us to switch point B (assuming that all other things remain constant). This has clear implications for the health and welfare of those individuals currently engaged in the illicit market.

What did they say about Plain Packaging?

An innovative Australian federal policy is the proposal to ban brand identity from cigarette packets. Given that the illicit market consists of essentially unbranded tobacco, this policy will blur the distinction in terms of the product differentiation between the two markets. Moreover, it was suggested by one of the major tobacco companies operating in Australia (British American Tobacco) that their response to this policy would be to halve the price of the legal tobacco that it sells. Such a response would create a direct impact on the price ratio. Our analysis shows that illicit tobacco consumers are relative price sensitive, even in a highly differentiated product market. Thus one would expect the removal of branding to increase the relative price sensitivity and lead to concerns about the overall benefit of such a policy.

Well done.

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10 Responses to Illicit Tobacco Demand

  1. tom

    If you do not accept that this demonstrates leftism is a mental illness, you do not live in the real world. Q.E.D.

  2. Bruce of Newcastle

    This point occurs at a price ratio of 1:2.50

    Since the price of a packet of cigs in Jakarta is less than AU$2 versus $13 here even for the cut price stuff that has stirred everyone up, I’d say the smugglers’ market is not about to disappear anytime soon.

  3. Johnno

    So the Australian Taxpayer paid $165,000 to find out that as the price gap between legal and illegal tobacco grows then people increase their relative consumption of illegal tobacco. I’m not sure why the paper won the prize – the findings are hardly surprising.

  4. .

    “You should have seen the competition!”

  5. Aristogeiton

    Is that TeX typesetting? If so, I approve.

  6. Diogenes

    Sadly illicit tobacco is not option for the cigar or pipe smoker. Having said that all my non smoker friends and rellies enable my addiction by bringing in the maximum they are allowed duty free for me when they travel overseas :-). For some reason they mentally draw a line at bringing in cigarettes, but happy to get cigars or pipe tobacco – go figure!

  7. Goanna

    The government would like to thank all smokers.
    Please continue contributing the coffers.

  8. The Australian refused to publish this –

    Letter to the editor

    As part of The Australian’s campaign against plain packaging, [Tuesday]’s editorial refers to Friday’s front-page article as a “perfectly reasonable report”. That article was based on a secret report apparently provided by tobacco interests with comments only from the tobacco lobby. The report remains secret, so it is impossible to analyse it or to understand why the conclusions differ from official figures.

    The Australian asked me for comment on Friday morning?—?after the article had appeared?—?but refused to provide the report. On Tuesday afternoon, after the ABC’s Mediawatch segment, a reporter and photographer from the Australian arrived at my office without warning, saying they wanted to ask questions about statistics. I said that I would comment if I could have a copy of the report, but they were unable to provide this. An hour later, the reporter ‘phoned to say that he could send me the report. Half an hour after this he ‘phoned back to say that he had been told he could not provide the report?—?only a graphic that had appeared in The Australian.

    Even setting aside the rest of The Australian’s campaign (so far three front pages, two editorials and multiple articles), it is hard to see how all this can be described as “perfectly reasonable” journalism. It is also hard to understand why The Australian persists in claiming failure for plain packaging after 18 months in the face of not only encouraging official figures, but crucially the reality that, as Nicola Roxon emphasised from the outset, “Of course we’re targeting people who have not yet started, and that’s the key to this plain packaging announcement?—?to make sure we make it less attractive for people to experiment with tobacco in the first place”.

    A related article refers to me with phrases including “political involvement” and “Gillard government adviser”. I was Deputy Chair of the National Preventative Health Taskforce and chaired the tobacco expert committee. It is ridiculous and offensive to describe that as “political involvement”, or to imply that membership of expert health committees somehow makes one politically partisan. I have enjoyed working for and with governments and Ministers from both sides of politics, have no political links, and was indeed publicly critical of the last government on various issues. My last “political involvement” was as a member of the British Young Conservatives in the 1960s.

    Professor Mike Daube AO
    Professor of Health Policy
    Curtin University, Perth, Western Australia

  9. .

    Daube’s a liar and an idiot.

    I’m not surprised.

  10. Aristogeiton

    The big question Numbers, is what does this sorry saga have to teach us about gun control and our involvement in Vietnam?

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