The price elasticity of demand for cigarettes in the UK
Tessa Langley
Lecturer
University of Nottingham
Howard Reed
Director
Landman Economics
Background
• Increases in retail price recognised as effective
strategy for reducing demand for tobacco
• Increasing price through increases in tax key
component of government policy
• Policymakers need accurate estimates of extent to
which demand for tobacco is affected by price
Price elasticity of demand
• Key measure of effectiveness of increasing price to
reduce consumption
• Measures change in consumption in response to
price change
• If elasticity is between 0 and -1, commodity is
inelastic
• If elasticity is < -1, commodity is elastic
• i.e. The lower the absolute value, the higher the
elasticity
Elasticity examples
If price elasticity = -0.4
10% increase in price of tobacco
 4% decrease in demand for tobacco
If price elasticity = -0.9
10% increase in price of tobacco
9% decrease in demand for tobacco
Note – ↓ in consumption ≠ ↓ in prevalence
Elasticity and tax revenue
• Elasticity also affects revenue yield from
increases in taxation
• The lower the elasticity of demand, the higher
the revenue from increases in tobacco taxation
– Volume of cigarettes decreases by less in
response to price increases
Price elasticity of demand in the UK
A frequently cited paper: Townsend et al. 1994
- Survey data
- -0.5 for men, -0.6 for women
Recent study: Czubek & Johal (HMRC) 2011
- Time series analysis of expenditure of UKDP cigarettes
duty-paid cigarettes and tobacco industry price data
- 1982-2009
- -0.92 to -1.17
- No formal test of stability of results over time
- No controls for illicit or cross-border markets
- No statistical confidence intervals
AIM
Use Czubek/Johal model (and data) to conduct
detailed study of impact of price changes.
OBJECTIVES
• Obtain up to date elasticity estimate
• Include data on other parts of market, esp. Illicit
market, EU cigarette price data
• CI using bootstrapping
Research realities...
• Unable to use Czubek/Johal data
– Tobacco industry refused use of price data
– But obtained data up to 2012
• Illicit market data only available from 2000
– No estimates over time
• Cross-border price data not suitable
Data
Consumption Data
– Monthly data on UKDP sticks cleared for consumption
– Jan 1991 – Dec 2012
– Dummy variables to adjust for stockpiling ahead of tax
increase in Budget
cigarette consumption
consumption (sticks per capita)
1000
900
800
700
600
500
400
300
200
100
0
1991
1993
1995
1997
1999
2001 2003
year
2005
2007
2009
2011
Data
Price data
– Weighted average price
– Clearances & duty receipts
cigarette price (log)
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Data
Other explanatory variables (among others)
– Consumption of HRT
– Duty rate on HRT (proxy for price)
– Size of illicit market for HRT and cigarettes (since 2001)
Statistical methods
• Cointegration modelling of data series in levels
• Two-step Engle-Granger approach
• Confidence intervals estimated using sieve
bootstrap procedure
Results
•
•
•
•
Time span
1991-2012
2001-2012
2001-2012
Illicit market
variables?
No
No
Yes
Elasticity
-0.35
-0.78
-0.78
95% CI
-0.51 to +0.02
-2.56 to +2.24
-2.58 to +2.25
90% CI
-0.44 to -0.05
-2.00 to +1.40
-2.01 to +1.41
Using entire time range (1991-2012), elasticity estimate of -0.35
Significant at 10% level (not 5% level)
Estimates on 2001-12 data not significant
Adding illicit market variables makes no difference to estimated elasticity
Discussion
• Price appears to influence consumption of UKDP
cigarettes, but limited power (CI wider than for
OLS)
• Limitations
– Volatile data due to inaccessible industry data
– No illicit market data pre-2000
– Uncertainty in estimates
Discussion
• Builds on Czubek & Johal paper
– Controls for illicit market
– Data up to 2012
• Results in line with existing UK and international
estimates
• Increasing price should continue to be key part of
UK tobacco control policy
Conclusions
• Price continues to be an effective tool in reducing
tobacco consumption
• Further research needed:
– More accurate estimates
– Prevalence elasticity
– Elasticity of HRT
– Price segmentation
References
Townsend J. Price and consumption of tobacco.
British Medical Bulletin 1996; 52(1): 132-42.
Czubek, M and Johal, S (2010), “Econometric
Analysis of Cigarette Consumption in the UK”,
HMRC Working Paper No 9,
http://www.hmrc.gov.uk/research/cigconsumption-uk.pdf
Funded by Cancer Research UK’s Tobacco Advisory Group
Acknowledgements
Deborah Arnott, Action on Smoking and Health
Thanos Alifantis and colleagues, HMRC