The elasticity of tobacco products

In order to estimate tobacco price elasticity, we apply two approaches. The first is based on the macro-level time series data, i.e. one measure of price and consumption (and other control variables) per observation period and price elasticity estimated via regression (cointegration) analysis. Comparable time-series estimates are available for the period between 2002 and 2016. An alternative approach is based on the use of micro- level data and has its theoretical foundation in consumer theory. For this estimation we use the HES data for years between 2012 and 2016, and the model proposed by Deaton (1988). In Table 6 we report country-level estimates of price elasticity for both models. As both models contain controls for income (or expenditure as proxy for income), we also report income elasticity for both models.

 

  • Numbers represent % decrease in consumption as a result of 1% increase in price and income, respectively.
  • Analysis on the individual (HES) data in Croatia uses data for all households, including tobacco-spenders and non-spenders, while in other countries only the households who reported the positive spending on tobacco were included in the analysis.
  • HES data in Macedonia was not available, so only the analysis using the time-series data was conducted.

 

Estimated price elasticity for all seven countries using all the models is negative and statistically significant. According to time-series analysis conducted by national teams, price elasticity for cigarettes is estimated in a range between -0.44 in Croatia and -0.83 in B&H. These values correspond to research conducted in other low- and middle-income countries. According to the analysis conducted by the national teams using the HES data, price elasticity for cigarettes is in a range between -0.29 in Kosovo and -1.07 in Croatia. For all countries except Croatia, estimates obtained based on the individual-level data are slightly lower than the estimates from the aggregate (time-series) data, which is not surprising given only the households who reported positive spending on tobacco were included in their analysis. Negative price elasticities in all seven countries suggest that increasing the price of cigarettes through higher excise taxes would decrease smoking prevalence in all seven countries in the SEE region.

are slightly lower than the estimates from the aggregate (time-series) data, which is not surprising given only the households who reported positive spending on tobacco were included in their analysis. Negative price elasticities in all seven countries suggest that increasing the price of cigarettes through higher excise taxes would decrease smoking prevalence in all seven countries in the SEE region.

Since both models for the estimation of price elasticity also include a control for income (or total household expenditure, which is a proxy for income in the HES data analysis) it was also possible to estimate the income elasticity of quantity demand. In Albania, B&H, Kosovo, and Serbia, the estimated income elasticities are positive, suggesting that an increase in GDP per capita would result in an increase in tobacco consumption (Table 7). Income elasticity is negative in Croatia, Macedonia, and Montenegro, which can be attributed to increased awareness and appreciation of the health risks of smoking among those in higher income groups. However, in interpreting these results one should keep in mind that the length of time-series was too short to obtain, with confidence, efficient and robust estimates. On the other hand, the estimated expenditure (income) elasticities based on the HES data provided seem to be consistent and more reliable. They range from 0.24 in Albania and Kosovo to 0.91 in Croatia, and suggest that an increase in disposable income, all other things being equal, results in growth of tobacco consumption as tobacco becomes more affordable.

Price and income elasticities of cigarette quantity demanded in SEE

Time-series data model

  Price elasticity Income elasticity
Albania -0.78 0.03
B&H -0.83 0.25
Croatia -0.44 -0.92
Kosovo -0.68 0.17
Macedonia -0.47 -0.16
Montenegro -0.68 -1.37
Serbia -0.76 0.33

Individual data model

  Price elasticity Income elasticity
Albania -0.57 0.24
B&H -0.65 0.50
Croatia -1.07 0.91
Kosovo -0.29 0.24
Macedonia 0 0
Montenegro -0.57 0.27
Serbia -0.45 0.53