Estimating Own- and Cross-Price Elasticity of Cigarette Consumption by Price Tiers in Bangladesh [Working Paper Series]

This Working Paper was written by the Institute of Health Economics (IHE) in Bangladesh. The study examined the impact of the tiered price and tax system by estimating own- and cross-price elasticities of low- and high-priced brands, as well as income elasticities of cigarette consumption by price tier. Researchers find that the total elasticity (smoking prevalence and intensity) for low-price cigarettes is -0.1678. The own-price elasticity of the smoking intensity of high-price cigarette brands is -0.2512, while the cross-price elasticity of low-price cigarette consumption with respect to high-price brand prices is 0.2643. This implies that increasing the price of high-price cigarettes by 10% would increase consumption of low-price cigarettes by 2.643%, suggesting that smokers may switch to cheaper brands when faced with price increases. Therefore, increasing the price of cigarettes in the low-tier is critical to reducing tobacco use, especially since low-price brands dominate the market. On the other hand, as incomes rise, smokers are likely switching from low- to high-price brands: the total income elasticity for low-price cigarettes is -0.1370, while the total elasticity for high-price cigarettes is 1.4608. The working paper concludes with a set of recommendations for policy makers, highlighting the importance of increasing the price of the low-price cigarettes and reducing the price differential between tiers so that all cigarettes are taxed at the same rate.

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