An econometric analysis of the demand for cigarettes in Italy after the introduction of heated tobacco products in 2016

Abstract

PurposeThis article provides evidence of a long-term structural relationship between demand for heated tobacco products (HTPs) and for combustible cigarettes in a Marshallian demand framework, using data from the Italian market.Design/methodology/approachA cointegration-based approach allows to capture the substitution effects between the two products arising for reasons (possibly) other than price.FindingsThe authors find that such a relationship exists and is sufficiently strong to constitute a cointegration.Social implicationsSince a fully consolidated consensus on reduced harm from smokeless tobacco products is absent, symmetric policies on both markets are therefore necessary in terms of regulation and excise incidence to minimize the social cost of substitution and to maximize government revenues, which are a necessary counterpart to negative externalities that arise with smoking both products.Originality/valueThis paper focuses on the Italian market with product specific volume and price data, both for cigarettes and HTPs. Because of the detected relationship, a regulatory trade-off arises in case of a relatively mild regulation on heated-tobacco products: benefits from decreasing demand for combustible cigarettes may be offset by the social cost of increasing consumption of heated tobacco products. Moreover, a milder regulation makes price related policies to curb smoking less effective.