Abstract
AimsTobacco tax increases are the most effective means of reducing tobacco use and inequalities in smoking, but effectiveness depends on transnational tobacco company (TTC) pricing strategies, specifically whether TTCs overshift tax increases (increase prices on top of the tax increase) or undershift the taxes (absorb the tax increases so they are not passed onto consumers), about which little is known.DesignReview of literature on brand segmentation. Analysis of 1999–2009 data to explore the extent to which tax increases are shifted to consumers, if this differs by brand segment and whether cigarette price indices accurately reflect cigarette prices.SettingUK.ParticipantsUK smokers.MeasurementsReal cigarette prices, volumes and net-of-tax- revenue by price segment.FindingsTTCs categorise brands into four price segments: premium, economy, mid and ‘ultra-low price’ (ULP). TTCs have sold ULP brands since 2006; since then, their real price has remained virtually static and market share doubled. The price gap between premium and ULP brands is increasing because the industry differentially shifts tax increases between brand segments; while, on average, taxes are overshifted, taxes on ULP brands are not always fully passed onto consumers (being absorbed at the point each year when tobacco taxes increase). Price indices reflect the price of premium brands only and fail to detect these problems.ConclusionsIndustry-initiated cigarette price changes in the UK appear timed to accentuate the price gap between premium and ULP brands. Increasing the prices of more expensive cigarettes on top of tobacco tax increases should benefit public health, but the growing price gap enables smokers to downtrade to cheaper tobacco products and may explain smoking-related inequalities. Governments must monitor cigarette prices by price segment and consider industry pricing strategies in setting tobacco tax policies.
Highlights
Raising tobacco taxes and prices is one of the most effective means of reducing tobacco use, in the young and the less well-off—who are known to be the most price sensitive [1,2,3,4,5,6]
It aims to identify how the tobacco industry segments its cigarettes by price, and to examine how price, volume and revenue trends vary by price segment, the extent to which tobacco tax increases are shifted to consumers, whether this differs by price segment and whether
The largest market share, around 50% of the market, is still held by the economy segment, this has fallen recently owing to gains in the ultra-low price’ (ULP) segment
Summary
Raising tobacco taxes and prices is one of the most effective means of reducing tobacco use, in the young and the less well-off—who are known to be the most price sensitive [1,2,3,4,5,6]. The effectiveness of tobacco tax policies depends on tobacco company pricing strategies. Tobacco companies can choose to absorb the tax increase so that it is not passed onto to consumers as an increase in price, undermining the effect of tobacco tax policy (a practice known as undershifting); to pass it onto consumers in full; or to increase prices on top of the tax increases (a practice known as overshifting and which increases both the effect of the tax increase and industry revenue). This article aims to examine tobacco industry pricing strategy in the UK. It aims to identify how the tobacco industry segments its cigarettes by price, and to examine how price, volume and revenue trends vary by price segment, the extent to which tobacco tax increases are shifted to consumers, whether this differs by price segment and whether
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