This chapter is to review the existing literature on the demand for cigarette. There is a large volume of published studies describing the price and income elasticity on cigarette consumption. Furthermore, there is also a large and growing body of literature has investigated the effects of taxes and anti-smoking regulations on the demand for cigarettes. So far, there are only a few studies regarding the relationship between aging population and the consumption of cigarette.
2.1 Demand Model
2.2. Past Research
Several studies have revealed that there is an inverse relationship between price and cigarette consumption and positive effect of income. Franke (1994) finds that Granger Causality is significant from price and income to United States cigarette consumption. There is no significant change in the estimated demand elasticity occurred during the period studied. In order to test a model of the demand for the cigarettes in United States from 1961 to 1990, he uses quarterly data and multiple analyses. The results of the study show a positive effect of income and negative effects of price. Likewise, Zheng, Zhu and Li (2008) also find that there is positive income elasticity but negative cigarette price elasticity based on the best fixed-effects spatial-temporal model. In 2008, they construct a demand equation to examine the elasticity of per pack cigarette price and per capita disposable income. They consider the cigarette demand in a spatial panel of 46 states of the United States over a 30-year period which is from 1963 to 1992. They propose a new spatial panel models and adopt a fully Bayesian approach for model parameter inference and prediction of cigarette demand at future time points using the Markov chain Monte Carlo (MCMC) algorithms.
Chaloupka et al. (2002) uses data from tobacco industry document to determine what tobacco companies knew about the impact of cigarette prices on smoking among youth, young adults and adult. They evaluate how this understanding affected their pricing and price related marketing strategies. The tobacco company documents provide velar evidence on the impact of cigarette prices on cigarette smoking, describing how tax related and other price increases lead to significant reductions in smoking, particularly among the young people. They conclude that future tobacco control efforts that aim to raise prices and limit price related marketing efforts are important in achieving reductions in tobacco use and public health toll caused by tobacco. This view is supported by Fernández et al. (2004) which report that there is an inverse relation between price and consumption of cigarette in Spain between the period of 1965 and 2000, indicating that interventions at the economic level such as real increases in price may have an important public health impact in tobacco control. Correspondingly, Gallus et al. (2006) perform a similar study to determine the influence of cigarette price on tobacco consumption in Italy. They conduct a survey on 3050 individuals aged 15 and above and find that prices had an intermediate to high influence on cigarette consumption in the young. Younger and less educated smoker were more prone to report an influence of prices. They conclude that cigarette prices have substantial influence on tobacco consumption in the young people.
On the contrary, Raptou et al (2005) argue that cigarette demand is extremely insensitive to price changes. They use the data collected via questionnaire that was administered in personal-in-home interviews and estimate a two-part model of cigarette demand [Cragg, J. G. BSome Statistical Models for Limited Dependent Variables with Application to the Demand for Durable Goods,^ Econometrica, 39, 5, 1971, pp. 829Y44.]. They conclude that cigarette price measures do not influence cigarette demand but smoking restrictions in workplaces and educational establishment and most of the psychosocial variables are found to affect cigarette demand.
According to Huang and Yang (2006), recent estimates of the income elasticity of cigarette demand have pointed a disturbing result which is a nearly zero or sometimes negative income elasticity. They employ a four-regime panel model (dynamic fixed effect) to estimate the cigarette demand function in United States in order to explore the nonlinearity embedded in the cigarette demand structure. They apply a multi-regime model to 47 states using data from 1963 to 1997. They claim that there is a nonlinear relationship between personal income and cigarette consumption. Evidently, as income rises, cigarette has become an inferior good. The results from the four-regime model suggests that income elasticity is negative when per capita income is greater than US$ 8,568 but become positive though insignificant when income above US$ 18,196. In the income range between US$ 8,568 and US$ 18,196, the income elasticity is significantly negative. There is a nonlinear relationship prevailed for the price elasticity.High Quality Assignment Writing Service On assignment.lxws.net
Furthermore, Martinez, Mejia, and Estable (2008) states that the long term’s demand for cigarettes in Argentina is affected by the changes in real income and real average price of cigarettes. They analyze the data based on monthly time-series data between the periods of 1994 to 2004. The result shows that when the prices increase in a 120%, maximum of revenues from the cigarettes tax can be obtained and also a big impact in the fall of the total consumption of cigarettes in the country. Similarly, Abedian (2000) also states that there is an inverse relationship between the price and consumption of any good which include cigarettes.
This negative relationship further affected by other factors like income levels and the degree of addiction. He argues that tobacco consumption is increasing a developing country problem and it could bring harm to the people. He also argues that there are no adverse economic consequences following such policy framework.
In 2000, Joni Hersch states that smoking behavior responds to changes in price, not unlike many other economic commodities. He finds that higher prices reduce cigarette demand for both men and women with respect to smoking participation and cigarette consumption levels, with elasticity ranging from -0.40 to -0.60. In contrast to other studies, he finds that the price elasticity is similar for men and women. Income has negative effect on smoking behavior. He also states that excise tax policies can deter smoking, but their effects will be largely restricted to the low income segment of the population. This result suggests that there might be a constructive response by smokers to informational efforts that warn about the dangers that environmental tobacco smoke poses to others, particularly when it is members of one’s household.
Further observed that increased in taxes also play a big role in reducing the cigarette consumption. In recent years, there has been an increasing amount of literature on higher prices that result from increased tax lead to significant reductions in cigarette smoking. A recent study by Chaloupka et al (2010) are to provide empirical evidence on the effects of the cigarette excise tax structure on three outcomes which are the cigarette prices, government revenue, and cigarette consumption. They compose cross-sectional time-series data for 21 European Union (EU) countries from year 1998 to 2007 from various data resources. The estimates suggest that the greater reliance on the ad valorem excise tax leads to lower average cigarette prices and larger price gaps between premium and low-priced cigarette brands. In addition, these impacts from the tax structure are smaller in more concentrated or less competitive markets. They also propose that greater reliance on a specific tax has greater impact on cigarette smoking, but the impact diminishes with the growth of manufacturers’ market power.
In view of this, Peng and Ross (2009) estimates the sensitivity of Ukraine population to cigarette prices and the affordability of cigarettes using the macro level data in order to predict the effectiveness of cigarette tax policy. They use a monthly time-series data from 1997 to 2006 in Ukraine to estimate the generalized least square (GLS) model with an AR(1) process. The result shows that the cigarette price is not significantly associated with legal domestic sale of cigarette. Higher household income and more active outdoor advertising have positive and significant impact on cigarette sales. There is also a positive relationship between the affordability for cigarette and legal domestic cigarette sales. Increasing the cigarette excise tax by 10% would increase the cigarette price by 3%. This demonstrates that cigarette tax policy can be used to regulate cigarette price in Ukraine. The population is found to have relatively low sensitivity to cigarette prices and cigarette taxes, even though of low magnitude but the impact of cigarettes affordability is statistically significant. Similarly, Lee et al. (2005) conclude cigarette price elasticity estimate to be less than one, meaning that although the tax will have some effect in reducing cigarette consumption, it will also generate additional tax revenues.
Moreover, Hidayat and Thabrany (2010) study the demand for cigarettes through a myopic addiction model and use it to estimate the price elasticity of cigarette demand in Indonesia. They use an aggregated panel data taken from three waves of the Indonesian Family Life Survey over the period of 1993 to 2000. They propose that the short run and long run price elasticity of cigarette demand are estimated at -0.28 and -0.73 respectively. Price increases had a negative and significant impact on cigarette consumption. Increasing cigarette prices via excise taxes can control tobacco use and thus raise government revenue. They conclude that excise taxes are more likely an effective tobacco control in the long run rather than a major source of government revenue.