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The Effect of Cigarette Prices on Cigarette Sales: Exploring Heterogeneity in Price Elasticities at High and Low Prices

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Listed:
  • John A. Tauras
  • Michael F. Pesko
  • Jidong Huang
  • Frank J. Chaloupka
  • Matthew C. Farrelly

Abstract

Numerous studies have examined the effect of cigarette prices on cigarette consumption. These studies either evaluate the price elasticity of demand for each observation and report the average price elasticity across all observations or report the price elasticity of demand at the mean of the price variable. Policy makers rely on these average price elasticity estimates for public health and revenue generation purposes. The use of an average price elasticity may yield misleading predictions given the substantial variation in cigarette prices between states. This research is the first econometric study to examine the price elasticity of cigarette demand at different price levels. We use aggregate state-level data for years 1991 – 2012 and employ generalized linear models with log link and gamma distribution to estimate cigarette demand equations. We find that the absolute value of the price elasticity of demand monotonically increases with price. The findings from this study will be valuable to policymakers contemplating the use of cigarette excise taxes to reduce cigarette consumption or to generate revenue.

Suggested Citation

  • John A. Tauras & Michael F. Pesko & Jidong Huang & Frank J. Chaloupka & Matthew C. Farrelly, 2016. "The Effect of Cigarette Prices on Cigarette Sales: Exploring Heterogeneity in Price Elasticities at High and Low Prices," NBER Working Papers 22251, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22251
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    References listed on IDEAS

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    1. Farrelly, Matthew C. & Pechacek, Terry F. & Chaloupka, Frank J., 2003. "The impact of tobacco control program expenditures on aggregate cigarette sales: 1981-2000," Journal of Health Economics, Elsevier, vol. 22(5), pages 843-859, September.
    2. Manning, Willard G. & Mullahy, John, 2001. "Estimating log models: to transform or not to transform?," Journal of Health Economics, Elsevier, vol. 20(4), pages 461-494, July.
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    Cited by:

    1. Johanna Catherine Maclean & Michael F. Pesko & Steven C. Hill, 2017. "The Effect of Insurance Expansions on Smoking Cessation Medication Prescriptions: Evidence from ACA Medicaid Expansions," NBER Working Papers 23450, National Bureau of Economic Research, Inc.
    2. Saša Ranđelović & Milica Bisić, 2021. "Excise duties harmonisation and smoking in a model with cross-border arbitrage," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(2), pages 507-532, May.
    3. Leah K. Lakdawala & David Simon, 2016. "The Intergenerational Consequences of Tobacco Policy," Working papers 2016-27, University of Connecticut, Department of Economics.
    4. Susan Xu Tang & David L. Sjoquist, 2019. "Differential Effects of Federal and State Gasoline Taxes on Gasoline Consumption," Hacienda Pública Española / Review of Public Economics, IEF, vol. 229(2), pages 11-32, June.
    5. Sinclair Davidson & Ashton de Silva, 2018. "Did Recent Tobacco Reforms Change the Cigarette Market?," Economic Papers, The Economic Society of Australia, vol. 37(1), pages 55-74, March.
    6. D. Dragone & D. Raggi, 2018. "Testing Rational Addiction: When Lifetime is Uncertain, One Lag is Enough," Working Papers wp1119, Dipartimento Scienze Economiche, Universita' di Bologna.
    7. Paolo Liberati & Francesco Crespi & Massimo Paradiso & Simone Tedeschi & Antonio Scialà, 2018. "Smokers Are Different: The Heterogeneity Of Smokers’ Responses To Price Increases," Departmental Working Papers of Economics - University 'Roma Tre' 0237, Department of Economics - University Roma Tre.

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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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