Price Responsiveness of Cigarette Demand in US: Retail Scanner Data (1994–2007)

Abstract

This paper investigates the changes in cigarette demand in response to the changes in cigarette prices; smokeless tobacco prices; adoption of clean indoor air laws (CIALs). We used an error-correction econometric method to estimate the cigarette sales adjustment path in response to changes in prices and CIAL coverage in the United States by utilizing scanner data from supermarkets. Finding from this study indicates that smokeless tobaccos are not perfect substitutes for cigarettes, but increases in the price of cigarettes are associated with an increase in smokeless tobacco sales. The error-correction econometric method suggest that the demand for cigarettes and smokeless tobacco is related to each other; a price increase in either product leads to an increase in demand for the other product. However, the adjustment paths are quite different; an increase in cigarette prices lowers cigarette sales in relatively faster rate than decreases in smokeless tobacco prices or adoption of smoke-free laws. Changes in cigarette demand in response to changes in cigarette prices occur relatively quickly; but the full effects of smokeless tobacco price change and the adoption of 100% smoke-free laws on cigarette demand take a longer time.