Smokers are different: The impact of price increases on smoking reduction and downtrading

Abstract Using data from an ad hoc survey conducted in July 2016 on Italian smokers’ habits, we investigate how different categories of smokers react to different types of price changes by means of latent class econometric analysis. While the previous literature focused on the effects of general price changes and overlooked substitution effects among brands, the present analysis unveils that the probability of reducing cigarette consumption is always higher for uniform rather than uneven price increases across brands. Moreover, downtrading to cheaper products is found to increase with the size of price changes, provided that these are uneven across brands. Finally, we provide a range for the implicit elasticity of cigarette demand. While being inelastic on average, it ranges between 0.2 and 0.9 depending on the smoker category. These findings have important implications for the design of both health and tax policies, as they provide new insights into the potential reactions of smokers to policy interventions.