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OP01 How a Detailed Understanding of Industry Activities can Inform Public Health Policy: The example of Cigarette Pricing in Britain
  1. A B Gilmore,
  2. B Tavakoly,
  3. G Taylor,
  4. H Reed
  1. Department for Health and UK Centre for Tobacco Control Studies, University of Bath, Bath, UK

Abstract

Background Tobacco tax increases are the most effective means of reducing tobacco use and inequalities in smoking but effectiveness depends on transnational tobacco company (TTC) pricing strategies, specifically whether TTCs overshift tax increases (increase prices on top of the tax increase) or undershift the taxes (absorb the tax increases so they are not passed onto consumers), about which very little is known. Our routine monitoring of TTC activity had shown that, despite falling sales and consumers shifting down to cheaper cigarette brands, TTC profits were increasing. We therefore aimed to examine tobacco industry pricing strategy in Britain and the extent to which it might undermine the public health objectives of tobacco taxation policy.

Methods A. Review of industry and retail literature was used to inform the allocation of cigarette brands to price segments. Analysis survey, commercial and routine data covering the period 1999 to 2009 was used to explore (i) value and volume market share by price segment; (ii) real price trends using CPI indexation; (iii) revenue by price segment; (iv) the extent to which tax increases were transferred to consumers and whether this differs by price segment; (v) whether commonly used price indices, including the retail price index for cigarettes accurately reflect price trends when compared with the weighted average price of cigarettes.

B. TTCs categorise brands into four price segments: premium, economy, mid and “ultra-low-price” (ULP). TTCs have only sold ULP brands since 2006 whence their real price has remained virtually static and their market share doubled. The price gap between premium and ULP brands is increasing because the industry differentially shifts tax increases between brand segments: while on average taxes are overshifted, taxes on ULP brands are not always fully passed onto consumers. Most notably, at the point each year when tobacco taxes increase, the industry is absorbing taxes on the ULP brands. Price indices reflect the price of premium brands only, despite the fact that the market share of premium brands has fallen substantially over time and thus fail to detect these problems.

Conclusion Industry initiated price changes appear timed to reassure price-sensitive smokers and accentuate the price gap. While overshifting should benefit public health, the growing price-gap enables downtrading to cheaper products and may explain smoking-related inequalities. Governments must monitor cigarette prices by price segment and consider industry pricing strategies in setting tobacco tax policies. Monitoring of corporate activities can inform public health policy developments.

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