A research report by the University of Bath in the UK concludes that British tobacco firms have been using pricing strategies with the objective of undermining tobacco tax policy.
Every year the British Government raises taxes on tobacco with the main objective of increasing the price of tobacco products and as a result, discouraging smoking. Yet the research report “Understanding tobacco industry pricing strategy and whether it undermines tobacco tax policy: the example of the UK cigarette market” recently published by the University of Bath’s Department for Health concludes that
“tobacco companies have been absorbing the taxes on their ultra-low-price products so their price remains constant and affordable to smokers on a low income,” undermining efforts by the government to reduce smoking in the UK.
Tobacco firms classify their cigarette brands into four price categories: premium, mid-price, economy and ultra-low-price (ULP) . The University of Bath’s report shows that the first three have experienced a gradual price rise over the years, while the ULP cigarettes average price has barely changed since 2006. This means that tobacco companies are absorbing the ULP taxes themselves instead of passing them on to the consumers of those products, who might be deterred from smoking should the price rise. As a consequence, the market share of ULPs doubled from 2006 to 2009 and decreased for the other three categories, as many smokers change to cheaper cigarettes to afford continuing smoking. However, this has not translated into a decrease of the companies’ revenues as the price of the premium brands, purchased by high income customers who are not likely to stop smoking due to price fluctuations, have been boosted.
According to Anna Gilmore, Professor at the University of Bath, a member of the UK Centre for Tobacco Control Studies and the paper’s lead author, this research report, which has been developed using consumer and market research from 1999 to 2009, is the first detailed analysis of the price structure of cigarettes in UK. She says that “tobacco companies use their price changes to win two ways in the UK” as “revenues increase and fewer people quit smoking” and suspects that these results may be applicable to other countries. To stop tax manipulation, Ms Gilmore proposes the UK government creates a public agency to ensure that tobacco companies impose tax increases to all their products and to “find ways to narrow the price gap between the cheapest and the most expensive cigarettes and prevent them from discounting their cheapest brands.”
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