How the tobacco industry uses pricing to undermine tobacco taxation

Taxing tobacco products is the most effective means of controlling tobacco use, so the tobacco industry uses a range of sophisticated pricing strategies to undermine the preventive effect of tax increases.

New research shows how tobacco companies use different pricing strategies in different markets to undermine tax increases and encourage people to smoke. When a state passes a tax increase on tobacco, tobacco companies pass the cost on to consumers, right? Not quite, as a new study shows.
Researchers at the University of Bath have found that the tobacco industry uses a variety of pricing strategies to undermine or weaken the effect of tax increases. This keeps the number of smokers and the industry's profits high.

Pricing strategies
In their meta-analysis, the research team identified the following six key pricing strategies:

1. Differential pass-through of the tax increase:
   - Overshifting: tobacco manufacturers pass on the tax increase to consumers and additionally increase the retail price on top of it.
   - Undershifting: tobacco manufacturers absorb the additional costs of the tax increase at the expense of their own margins and thus prevent or delay a price increase.
2. Introduction of new brands/products:
   - New, cheaper brands, variants and products aimed at persuading customers who cannot afford their regular brand to switch, rather than to stop using tobacco.
   - More expensive products aimed at customers who are willing to pay more for "luxury brands".
3. Flexible pricing and promotions
   Flexible pricing allows different prices to be charged to different customers, according to their financial possibilities. Promotions are temporary price reductions such as three-for-two promotions. This allows the tobacco industry to retain price-sensitive smokers while attracting new customers.
4. Smoothing price increases
   To prevent price jumps after the introduction of tax increases, the tobacco industry initially absorbs the additional costs of the tax increase. Thereafter, prices are increased in small, regular steps. These small steps have little or no effect on reducing tobacco consumption.

5 Adjustment of pack size
By reducing the number of cigarettes in a pack, the price increase is concealed from consumers.

1. Adjustment of the products or their declaration
   Tobacco taxes differ from product to product. By adapting the products or declaring them differently, tax increases can be avoided.

Different strategies for different markets
The survey shows that the most popular strategy was differential tax shifting, with overshifting more common in high-income countries and undershifting more common in low-income countries. This suggests that the tobacco industry has a strategy of market expansion in low-income countries and a strategy of profit maximisation in high-income countries. In Switzerland, overshifting is the norm when it comes to tax increases. In low-income countries, the industry has also introduced new versions of previous brands – or new, cheaper brands targeting women and younger people.

Targeted tactics and loopholes
The study shows that the tobacco industry has developed targeted promotional tactics to lower the cost of smoking for smokers. These include vouchers, promotional campaigns and price differentials depending on the location or type of shop. This strategy increases profits and is targeted at low-income or price-sensitive consumers such as young people. In Switzerland, promotions are commonplace, allowing consumers to reduce the cost of tobacco use, which undermines tobacco prevention efforts.
Previous research on the UK market has shown that cigars are a good example of product declaration changes, as they are taxed at a lower rate than cigarettes and are exempt from some restrictions. This research shows how the tobacco industry exploited these loopholes in the law by bringing cheap cigars and low-priced cigarette-like filtered cigarillos to the market.

Exposing and countering the industry's strategies
Evidence shows that taxing cigarettes is the most effective and cost-efficient way to reduce smoking, as high prices encourage smokers to quit or smoke less and discourage young people from taking up smoking. Therefore, it is important to understand the strategies companies use to undermine taxation.

Bibliography
Sheikh, Zaineb Danish; Branston, J. Robert; Gilmore, Anna B. (2021): Tobacco industry pricing strategies in response to excise tax policies: a systematic review. In: Tob Control, tobaccocontrol-2021-056630. DOI: 10.1136/tobaccocontrol-2021-056630. (https://tobaccocontrol.bmj.com/content/early/2021/08/01/tobaccocontrol-2021-056630)