Thursday, 12 June 2014

Crystal balls: tobacco plain packaging edition

When Australia was moving toward plain packaging, I expected that it would shift consumers toward discount brands and that you could simultaneously reduce tobacco company profits while increasing consumption, absent substantial-enough excise increases. Where brand appeal becomes less effective, we'd expect moves toward price competition instead. I'd written:
The tobacco industry's been pretty angry about plain packaging. If brand labelling mostly works to reduce competition across brands and to help maintain customer loyalty, we'd expect that plain packaging mandates will lead to a shift towards discount brands and lower prices absent further excise hikes. And that's also what Clarke and Prentice expect.** You can simultaneously have a policy anger the tobacco industry while increasing smoking if it pushes current smokers to discount brands, reducing the average price they pay and consequently increasing consumption while decreasing industry profits. The policy that's the enemy of your enemy isn't necessarily your friend.
And see here as well.

The "Scream Test" is a poor measure of whether a policy reduces harm: a policy that hurts some industry you don't like doesn't automatically make the world a better place.

Sinc Davidson reports that prices are dropping in Oz, despite excise increases, and that consumption's rising. Always-reliable Senator Nick Xenophon is consequently pushing for tobacco minimum pricing. A graph showing reduced tobacco expenditures has been making the rounds on Twitter; that can be entirely consistent with increased consumption where consumers are shifting to discount brands or if tobacco companies are dropping prices to maintain market share.

I suppose in full equilibrium, where the government raises excise sufficiently to get prices back up to ex ante levels, you'll have transformed some producer and consumer surplus into tax revenue, with excess burden in the form of reduced brand affiliative benefits for consumers who enjoy brand affiliation.

While I understand excise hikes for the next few years were scheduled a while back, I wouldn't be surprised if discounting and increased consumption led to excise increases greater than those previously scheduled.


  1. It really is quite interesting as the effect seems to have been commoditisation of the product and a drive to just price based competition. The pricing appears to be driving the increased consumption I guess as people respond to some type of budget constraint, now reduced by declining prices.

    I imagine the companies have initially increased profitability due to reductions in packaging and marketing costs etc, but will now face declining profitability due to the commoditisation. Of course this may eventually be offset by increasing consumption!

    A truly interesting, but also somewhat unfortunate experiment!

  2. The premise that 'tobacco consumption is up' comes from tobacco industry data (the out of context claim around 59 million sticks) that is dodgy - reality - The Australian Bureau of Statistics consumption of tobacco fell 4.9%. Not what the tobacco industry would have people think! In other words, Australians are consuming less tobacco than at any time since records began in 1959.

  3. I'd not seen that one, just figures on total tobacco expenditure that can't by themselves point to reduced total consumption. Will have to check. The simultaneous industry claim is increased illicit consumption; I'd guess ABS data would come from excise returns that wouldn't catch that, though Ministry of Health survey data might. Pointers welcome...