The Price Elasticity of Cigarettes: New Evidence From Spanish Regions, 2002-2016

Abstract

Introduction: There is an agreement in the literature that tobacco price elasticity is around -0.4 for given location. Furthermore, works only focus separately, on the temporal dimension or the spatial dimension, however, there are studies that show the existence of spillovers between different geographical areas due to the spatial dependence in tobacco consumption. The novelty of this study is the measurement of the effect that neighboring regions have on the price elasticity of cigarettes.

Aims and methods: This study simultaneously analyzed, first, a dynamic spatial model used to measure the price elasticity of cigarettes in the short term and long term of the 47 provinces that make up the Spanish territory, detailing the influence of neighbors. Second, given the spatial arrangement of the elasticities observed in the provinces, we can detect behaviors typical of large-scale illicit trade and cross-border purchasing since geographical location can be an important factor in smuggling, and politicians should take this into account when making price policies.

Results: Results reveal that the consumption of the regions is influenced by the consumption of the neighboring regions in the same period. The price elasticity of cigarettes in the long term exceeds in many cases, in absolute value, unity. This result is novel because tobacco has historically been treated as an inelastic demand good. Finally, we found that the regions that are most sensitive to price are those bordering France and Gibraltar or tourist regions, demonstrating the effect that smuggling has on the behavior of the regions.

Conclusions: These results are important because the price in Spain is set by the central government and fiscal policies regarding the price of tobacco can have different effects in different regions. This study has shown that the consumption of cigarettes is influenced by the neighboring regions and also measured different sensitivities for each region. Regional cooperation in tobacco control policies may have better effects than the elaborated policies based on historical information.

Implications: Policy makers should consider that tobacco could be an elastic good in the long term and that cooperation between countries in terms of price differential should be taken to avoid tobacco smuggling. The allocation of resources to control smoking should consider the special dependence shown in this report. Also, academics should account for spatial dependence to measure tobacco consumption instead of temporal analysis.