The Effect of Cigarette Prices on Cigarette Sales: Exploring Heterogeneity in Price Elasticities at High and Low Prices

18 Pages Posted: 13 Jun 2016 Last revised: 19 Apr 2021

See all articles by John A. Tauras

John A. Tauras

University of Illinois at Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Michael Pesko

Georgia State University - Department of Economics

Jidong Huang

School of Public Health, Georgia State University

Frank J. Chaloupka

University of Illinois at Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Matthew C. Farrelly

RTI International

Date Written: May 2016

Abstract

Numerous studies have examined the effect of cigarette prices on cigarette consumption. These studies either evaluate the price elasticity of demand for each observation and report the average price elasticity across all observations or report the price elasticity of demand at the mean of the price variable. Policy makers rely on these average price elasticity estimates for public health and revenue generation purposes. The use of an average price elasticity may yield misleading predictions given the substantial variation in cigarette prices between states. This research is the first econometric study to examine the price elasticity of cigarette demand at different price levels. We use aggregate state-level data for years 1991 – 2012 and employ generalized linear models with log link and gamma distribution to estimate cigarette demand equations. We find that the absolute value of the price elasticity of demand monotonically increases with price. The findings from this study will be valuable to policymakers contemplating the use of cigarette excise taxes to reduce cigarette consumption or to generate revenue.

Suggested Citation

Tauras, John A. and Pesko, Michael and Huang, Jidong and Chaloupka, Frank J. and Farrelly, Matthew C., The Effect of Cigarette Prices on Cigarette Sales: Exploring Heterogeneity in Price Elasticities at High and Low Prices (May 2016). NBER Working Paper No. w22251, Available at SSRN: https://ssrn.com/abstract=2794721

John A. Tauras (Contact Author)

University of Illinois at Chicago - Department of Economics ( email )

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Michael Pesko

Georgia State University - Department of Economics ( email )

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Jidong Huang

School of Public Health, Georgia State University ( email )

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Frank J. Chaloupka

University of Illinois at Chicago - Department of Economics ( email )

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Matthew C. Farrelly

RTI International ( email )

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