Price and Promotions:Myths and Realities

Kenneth E. WarnerUniversity of Michigan

National Conference on Tobacco or Health, December 10, 2003

Price: Tobacco Industry Myth #1

A large tax increase is dangerous because it will reduce government revenues by decreasing legal cigarette sales. This will result due to decreased smoking and increased smuggling of lower-priced cigarettes from neighboring states or countries.

When and how the myth is used

• Whenever governments consider a cigarette excise tax increase.

• The industry attempts to frighten officials into believing that a policy expected to increase revenue will do the opposite, and that it will introduce organized crime into the state or country.

Reality,with regard to cigarette sales...

• Cigarette taxation will reduce cigarette sales.– Increasing price is the most effective means of

decreasing cigarette smoking, especially among children.

– 10% price increase will decrease cigarette consumption 4% in developed countries, 8% in developing countries.

– Smoking among children will fall by about twice as much.

[Chaloupka et al., Ch. 10 in Jha and Chaloupka, 2000]

Real cigarette prices & per capita consumptionUS, 1970-2000

150017001900210023002500270029003100

1970 1975 1980 1985 1990 1995 2000

Year

Cig

aret

tes

per

capi

ta

60

80

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120

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Pric

e (1

982/

84 c

ents

)

consumption price

Reality with regard to revenues...

• Increased taxes invariably increase government revenues. – The percentage decline in cigarette consumption

is smaller than the percentage increase in price that induces it.

– Further, tax is only a fraction of price, so a given tax increase will cause a far smaller decrease in cigarette sales.

Federal cigarette tax rate & cigarette tax revenue in the US 1960-2000

0.00

0.05

0.10

0.15

0.20

0.25

0.30

1960

1962

1964

1966

1968

1970

1972

1974

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1998

2000

Year

Rea

l cig

aret

te ta

x ra

te p

er p

ack

(198

2/84

cen

ts)

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5

7

Rea

l cig

aret

te ta

x re

venu

e (b

illio

ns o

f 198

2/84

$)

Cigarette tax rate Cigarette tax renenue

Reality with regard to smuggling...

• Smuggling is a function of many forces.– Price but one.– Others likely far more important

• a state’s or country’s general tolerance for corruption• its specific efforts to combat smuggling (use of unique

tax stamps, enforcement, etc.). – Informal cross-border purchases (“buttlegging”)

accounts for a small share of in-state tax avoidance.[Joossens and Raw, BMJ, 2000]

Price: Tobacco Industry Myth #2

Even if a tax increase raises government revenues and decreases smoking, it is fundamentally unfair because its burden will fall disproportionately on the poor.

When and how the myth is used

• Whenever governments consider a cigarette excise tax increase.

• The industry appeals to officials’ concern for the welfare of the least privileged members of society, and to their basic sense of “fairness.”

Reality...• Cigarette taxes are regressive.

– A larger proportion of the poor smoke.• However, a tax increase may produce a

progressive impact– because the rich decrease their smoking only

slightly in response to a price increase– the poor decrease theirs substantially.

[Townsend et al., BMJ, 1994]

Furthermore...• Health benefit of a tax increase is distinctly

progressive.

• States and countries can compensate in part for any tax regressivity– e.g., by funding cessation services and

pharmaceuticals for poor smokers.

Promotion: Tobacco Industry Myth #1

Cigarette advertising and promotion have no effect on the amount of smoking. Their only function, and impact, is to permit the companies to vie for shares of a market of fixed size.

When and how the myth is used

• Whenever the freedom of the tobacco industry to advertise is debated.

• The industry attempts to persuade officials that an ad ban would not achieve its goal of reducing smoking, by adults or kids. Thus, why should they risk violating the Constitution’s prohibition on restrictions on free speech?

Reality...• Brand-share argument runs contrary to much

empirical evidence and makes no sense.– Especially in a highly concentrated market, as in

the U.S., much brand-share marketing merely cannibalizes a company’s own brands (e.g., Philip Morris controls half the market).

• If the industry truly believed its own argument, it would have leapt at opportunities to ban ads.

– In the U.S., it would save > $10 billion/year.

Promotion: Tobacco Industry Myth #2

A ban on cigarette advertising and promotion would clearly violate the Constitution’s guarantee of free speech and deprive adult smokers of useful information on cigarette contents.

When and how the myth is used

• Whenever the freedom of the tobacco industry to advertise is debated.

• The industry attempts to convince officials that an ad ban would violate the First Amendment of the Constitution, and interfere with adult smokers’ right to information.

Reality...

• A ban on commercial speech for dangerous products is not clearly unconstitutional.– Likely would depend on composition of the Supreme

Court hearing the case• Information in cigarette ads is not necessarily

useful (e.g., tar and nicotine delivery). [NCI Monograph #13, 2001]

• Presence of cigarette advertising discourages flow of information on smoking and health to consumers. [Warner et al., NEJM, 1992]

Promotion: Tobacco Control Community’s

Semi-MythCigarette advertising and promotion constitute one of the principal direct determinants of smoking, especially initiation of smoking by children.

When and how the myth is used

• Whenever the freedom of the tobacco industry to advertise is debated.

• Tobacco control community wants to convince officials that the crucial issue is the seduction of children, who are not legal consumers of tobacco products.

Reality...• Advertising and promotion (A/P) likely do

increase smoking, including encouraging experimentation by kids.– Considerable evidence, but no “smoking gun”.

• No evidence points to A/P as a principal direct determinant of smoking, however.– Peer and parental behavior and role modeling by

music and movie stars likely more important.

Reality (cont’d.)...

• A complete ban on A/P would be expected to decrease smoking by about 6%. [Saffer and Chaloupka, Journal of Health Economics, 2000]

• A complete ban is a useful and desirable component of comprehensive tobacco control. However, it would not constitute “the” solution to youth smoking.

Conclusions (1)• Price has a substantial impact on cigarette

smoking, especially by children. Raising price, principally through excise taxation, should be a “First Principle” of comprehensive tobacco control programs. Attention should be devoted to the impact on poor smokers, however.

Conclusions (2)• Cigarette advertising and promotion likely

increase smoking, although less than many tobacco control proponents believe. A ban on advertising and promotion likely would decrease smoking to a modest but significant degree. In addition, a ban would make a powerful statement about how society values the health of the public.

Recommended general readings on the economics of

tobacco• Warner, Tobacco Control, 2000.• Curbing the Epidemic: Governments and the

Economics of Tobacco Control (World Bank, 1999)

• Jha and Chaloupka, eds., Tobacco Control in Developing Countries (Oxford, 2000)

• Chaloupka and Warner, Ch. 29 in Culyer and Newhouse, eds., Handbook of Health Economics, vol. 1B (Elsevier, 2000)