Efficacy of the tobacco tax policy in the presence of product heterogeneity: A pseudo-panel approach applied to Spain

Abstract

This paper focuses on the substitution effects between different comercial presentations of tobacco in Spain. Concretely, on cigarettes, cigars and RYO. When taxing policies increase tobacco prices these effects might lead changes from more expensive to cheaper products instead of reducing tobacco consumption. We use micro-data for the years 2006 -2012. We estimate a complete model of demand. The own-price, the income and the cross elasticity of each good are estimated. The results show that the own-price elasticity of cigarettes is low and the income elasticity of cigarettes’ demand is very low. Thus in Spain smokers continue to buy cigarettes when the price of cigarettes increases and when cigarette consumers income declines. Moreover the substitutability relationship of cigarettes for cigars and RYO is weak. Thus, cigarettes smokers in Spain are loyal to this product and consider it a normal good. Moreover, cigar consumption presents high own-price and income elasticities, so cigars are luxury goods. Thus unlike cigarettes, cigar sales fall when cigar prices rise or cigar consumers income falls. Finally, RYO and cigarettes are substitutes goods and RYO and cigars are not substitute ones. That means that RYO and cigarettes can satisfy the same need; then to satisfy it the consumers can use almost indistinctibly the one or the other. This is not the case between RYO and cigars.