How Consumers Respond to Tobacco Price Changes: Evidence from Cigarettes and Heated Tobacco Products in Montenegro [Working Paper Series]

This Working Paper was written by the Institute for Socio-Economic Analysis (ISEA) in Montenegro. The working paper assesses the own- and cross-price elasticities of cigarettes and heated tobacco products (HTPs) to understand consumer response to price change. The researchers use monthly administrative data from the tobacco industry and consider four market segments: low-price cigarettes, medium-price cigarettes, premium-price cigarettes, and HTPs. The findings suggest that demand for HTPs is much more elastic than cigarettes, with own-price elasticities of -1.40 and -0.79, respectively. The cross-price elasticities were positive, which suggests that cigarettes and HTPs are economic substitutes. However, the substitution is asymmetric since a 10% price increase in cigarettes would increase HTP consumption by 7.1%, while a 10% HTP price increase would increase cigarette consumption by only 0.8%. The study also finds that HTP prices adjust toward cigarette prices in the long-term, with significant overlap in manufacturers. The working paper concludes with recommendations for policy makers to simultaneously implement cigarette and HTP tax increases to effectively reduce tobacco consumption, rather than driving consumers to switch to the cheaper, substitute good. 

A Policy Brief based on this working paper can be found here.