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How Do Smokers Respond to Cigarette Taxes? Evidence from China's Cigarette Industry
Author(s) -
Liu Hong,
Rizzo John A.,
Sun Qi,
Wu Fang
Publication year - 2015
Publication title -
health economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.55
H-Index - 109
eISSN - 1099-1050
pISSN - 1057-9230
DOI - 10.1002/hec.3084
Subject(s) - price elasticity of demand , economics , china , elasticity of substitution , tobacco industry , substitution (logic) , substitution effect , tax policy , discrete choice , microeconomics , advertising , public economics , tax reform , business , econometrics , medicine , production (economics) , programming language , pathology , political science , computer science , law
This paper examines how Chinese smokers respond to tax‐driven cigarette price increases by estimating a discrete choice model of demand for differentiated products, using annual nationwide brand‐level cigarette sales data in China from 2005 to 2010. We allow for substitution between different cigarette brands and also incorporate key features of rational addiction theory into the model. Results show that the average own‐price elasticity of demand for cigarettes at the brand level is –0.807, and the overall price elasticity of cigarettes at the market level is –0.488 in China. We find tax‐induced substitution toward low‐price cigarettes as well as high‐tar cigarettes and that tax hikes encourage within‐class substitution more than across‐class substitution. These results have important policy implications for the potential effects of cigarette taxation. Copyright © 2014 John Wiley & Sons, Ltd.