Download Factors affecting consumer behavior of purchasing tobacco products

Factors affecting consumer behavior
of purchasing tobacco products
Introduction
 The demand for a product means how much of the
product consumers are willing and able to purchase.
 The determinants of individuals’ demand generally
include price of the product, prices of related products,
consumers’ income and tastes.
 This presentation discusses the major determinants of
tobacco demand, in particular the relationship between
tobacco demand and the price of tobacco products and
consumer income.
Outline

Determinants of demand for tobacco products

Price elasticity of demand

Higher prices influence the demand for tobacco products in two ways

Global evidence on price sensitivity of tobacco consumption

Law of demand-Negative relationship between price and consumption

Price elasticity by age group

Price elasticity by income/education/socioeconomic status

Price elasticity by price band

Short-run vs long-run price elasticity

Decomposition of price responsiveness

Income elasticity of demand

Positive relationship between income and consumption

Changing consumers’ taste and increasing purchasing power
Determinants of consumer demand for tobacco
products
The consumption of tobacco depends on
– Price of the tobacco product
– Disposable income of the consumer
– Demographic characteristics of the population (e.g., gender,
age, ethnicity)
– Socio-economic status of the population (e.g., education,
occupation, employment status)
– Rural versus urban area of residence
– Tobacco control interventions (e.g., smoking restrictions, bans
on advertising and promotion of tobacco products)
– Knowledge and information about the health effects of tobacco
use
Price elasticity of demand
 The effect of price change on demand is measured by price elasticity.
 Price elasticity is defined as the percentage change in consumption in
response to 1% change in price.
 A price elasticity of -0.4 indicates that when price increases by 10%,
demand reduces by 4% in a reasonable period of time that allows the
consumers to adjust that tobacco use behavior. In effect, the cut down
in aggregate consumption is expected to appear in the monthly or
annual sales data available from government sources.
 The methods of estimating the price elasticity of demand are
summarized in the presentation 2.2 “Estimating Price and Income
Elasticity of Demand”.
Higher prices influence the demand for
tobacco products in two ways:
1. They reduce the prevalence of tobacco use
–
–
–
–
by discouraging non-users from taking up tobacco use;
by encouraging existing users to quit;
by helping former users to stay quit;
by preventing occasional smokers from turning into regular
smokers.
2. Higher tobacco prices reduce the consumption of tobacco
products among those who continue to use tobacco after a
price increase.
Total price elasticity = Price elasticity of smoking prevalence +
Price elasticity of smoking intensity
Global evidence on price sensitivity of
tobacco consumption
Increases in tobacco excise taxes
that increase prices result in
decline in overall tobacco use by
– Inducing current tobacco users
to quit
– Lowering the consumption of
tobacco products among
continuing users
– Reducing the initiation and
uptake of tobacco use among
young people, with a greater
impact on the transition to
regular use
Price: Law of demand
Negative relationship between price and consumption
regardless of income status of the countries
Kenya: low income (AFRO)
100
200
195
190
185
95
180
90
175
170
85
165
160
80
155
75
150
2002
2004
2006
2008
2010
Real average retail price per pack KES (CPI 2010=100)
Per capita retail sale (pieces)
Source: WHO calculations based on WHO, TMA and
World Bank data, 2011
Per capita retail sale
Real average retail price per pack
105
Price: Law of demand
Negative relationship between price and consumption
regardless of income status of the countries
320
Côte d'Ivoire: Lower middle income (AFRO)
0.34
300
0.32
280
0.30
0.28
260
0.26
240
0.24
220
0.22
Real average retail price per pack US$ (CPI, 2000=100)
Per capita retail sale (pieces)
Source: WHO calculations based on WHO, TMA and
World Bank data, 2011
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
200
2000
0.20
per capita retail sale
Real average retail price per pack
0.36
Price: Law of demand
Negative relationship between price and consumption
regardless of income status of the countries
750
South Africa: Upper middle income (AFRO)
11.30
10.80
650
10.30
600
9.80
550
9.30
500
8.80
2011
2010
2009
2008
2007
2006
2005
2004
400
2003
7.80
2002
450
2001
8.30
Real average retail price per pack of 20, Rands (CPI, 2000=100)
Per capita retail sales (pieces)
Source: WHO calculations based on WHO, TMA and
World Bank data, 2011
Per capita retail sales
700
2000
Real average retail price per pack
11.80
Price: Law of demand
Negative relationship between price and consumption
regardless of income status of the countries
Mexico: Upper middle income (AMRO)
490
1.5
Real average price
500
480
1.4
470
1.3
460
1.2
450
1.1
440
1.0
1998
1999
2000
2001
Real average price (USD)
2002
2003
2004
430
2005
Consumption per capita (pieces)
Source: WHO calculations based on WHO, TMA and
World Bank data, 2011
Consumption per capita
1.6
Price: Law of demand
Negative relationship between price and consumption
regardless of income status of the countries
Real price per pack
7.00
USA - High income (AMRO)
6.00
5.00
3000
2500
2000
4.00
1500
3.00
1000
2.00
1.00
500
0.00
1980
0
1990
2000
2010
Real price per pack (USD, CPI 2011=100)
Consumption (per capita), pieces
Source: WHO calculations based on data from Tax
Burden on Tobacco, 2011
Price: Law of demand
Negative relationship between price and consumption
regardless of income status of the countries
6.00
900
5.50
800
5.00
700
4.50
600
4.00
2011
2010
2009
2008
2007
2006
2005
2004
400
2003
3.00
2002
500
2001
3.50
Real average retail price per pack US$ (CPI, 2000=100)
Per capita retail sales (pieces)
Source: WHO calculations based on data from Tax Burden on Tobacco, 2011.
Per capita retail sales (pieces)
1,000
Sweden: High income (EURO)
2000
Real average retail price per pack
6.50
Cigarette price and adult smoking
prevalence in USA
Cigarette Prices and Adult Smoking Prevalence,
United States, 1970-2008
$4.25
35
31
$3.25
$2.75
27
$2.25
23
$1.75
19
$1.25
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
Year
Prevalence
Source: Frank Chaloupka
Price
2000
2003
2006
Price (2/09 dollars
Prevalence
$3.75
Negative relationship between cigarette prices
and adult smoking prevalence in USA, 2007
29
Cigarette Prices and Adult Prevalence,
50 States & DC, 2007
27
Adult Prevalence
25
23
21
19
17
15
y = -1.7038x + 27.473
R2 = 0.1756
13
11
$3.25
$3.75
$4.25
$4.75
Price per Pack
Source: Frank Chaloupka
$5.25
$5.75
$6.25
Cigarette price and youth smoking
prevalence, USA
Cigarette Price and Youth Smoking Prevalence,
United States, 1991-2008
$4.50
Price per pack (2/09
dollars)
31
$3.75
26
21
$3.00
16
Smoking Prevalence
36
11
$2.25
6
129.9
124.1
121
116.9
110.8
99.2
91.3
84.5
78.4
Year
Cigarette Price
Source: Frank Chaloupka
12th grade prevalence
10th grade prevalence
8th grade prevalence
Price elasticity by age group
 The youth are more price sensitive than the adults, particularly
with respect to smoking prevalence, which signifies the role of
price and tax measures in smoking prevention.
 Example: Myanmar price-elasticities
Smoking prevalence
Smoking intensity
-2.5
-2
-1.99
-1.5
-1.23
-1.08
-1
-0.94
-0.86
-0.89
45-54
55-64
65+
-0.5
0
15-24
25-34
35-44
Source: Kyaing, 2003.
-0.45
-0.4
-0.35
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
-0.42
-0.4
-0.37
15-24
25-34
-0.32
-0.32
35-44
45-54
-0.28
55-64
65+
Price elasticity by
income/education/socioeconomic status
-1.8
Viet Nam
-1.6
-1.4
-1.2
-1
-1.75
-1.16
-1.44
-1.15
-0.94
-0.75
-0.8
-0.59
-0.6
-0.5
-0.4
-0.4
-0.2
0
Smoking prevalence Smoking intensity
Low income
Source: Kinh et al., 2006.
All
High income
Total
Price elasticity by price band
Price elasticity
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Economy
Mid-price
Premium
The gradient of price elasticity by SES
can be translated into similar gradient for
price elasticity by price bands for
economy, mid-price and premium brands
of cigarettes for example. The underlying
assumption is that high income smokers
purchase premium brands, middle
income smokers purchase mid-price
brands and low-income smokers
purchase economy brands. Thus the
consumption of economy brands is most
price sensitive and the consumption of
premium brands is the least price
sensitive.
Time matters in price sensitivity:
Short-run vs long-run price elasticity
Country
Turkey
Brazil
Short-run
elasticity
-0.21
-0.11 to -0.35
Long-run
elasticity
-0.37
-0.48 to -0.80
China
-0.35
-0.66
Republic of
Korea
Chile
-0.28
-0.35
-0.22
-0.45
Source
Tansel (1993)
Da Costa e
Silva (1998)
Hu and Mao
(2002)
Kim and Seldon
(2004)
Debrott and
Sanchez (2006)
Decomposition of price responsiveness
Country
United Kingdom
Elasticity of
smoking
prevalence
-0.192
Elasticity of
Total price
smoking intensity elasticity
Source
-0.370
-0.562
Jones (1989)
China
-0.213
-0.250
-0.463
Bishop et al (2007)
Mexico
-0.06
-0.45
-0.52
Nepal
-0.46
-0.42
-0.88
Jimenez-Ruiz et al.
(2008)
Karki et al. (2003)
USA
-0.193
-0.191
-0.374
Franz (2008)
Canada
-0.02
-0.41
-0.45
Republic of Korea
-0.02
-0.64
-0.66
Russia
-0.106
-0.026
-0.132
Gruber et al.
(2003)
Chung et al.
(2007)
Lance et al. (2004)
Turkey
-0.03
-0.39
-0.41
Onder (2002)
Income elasticity of demand
 The effect of income change on demand is measured by income elasticity.
 An income elasticity of 0.2 indicates that when income increases by 10%,
demand increases by 2% in a reasonable period of time that allows the
consumers to adjust that tobacco use behavior. In effect, the growth in
aggregate consumption is expected to appear in the monthly or annual sales
data available from government sources.
 For tobacco products, income elasticity is usually positive, signifying that
tobacco is a normal good. Besides, with growing income, consumers tend to
switch to higher-priced tobacco products.
 The methods of estimating the income elasticity of demand are summarized
in presentation 2.2 “Estimating Price and Income Elasticity of Demand”.
Income: Positive relationship between income and
consumption
GDP per capita
65000
Kenya: Low income
190
60000
180
55000
170
50000
160
45000
40000
2002
200
2004
2006
2008
GDP per capita 2010 constant KES
Per capita retail sale (pieces)
Source: WHO calculations based on WHO, TMA and World
Bank data, 2011.
150
2010
Per capita retail sale
70000
Income: Positive relationship between income and
consumption
4000
Real GDP per capita
100
China: Upper middle income
90
80
3500
70
3000
60
2500
50
2000
40
1500
30
1000
20
500
10
Real GDP per capita (USD)
Consumption per capita (pack)
Source: WHO calculations based on WHO, TMA and
World Bank data, 2011.
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
0
Consumption per capita
4500
Cigarette prices, consumption and income in Turkey
1995-2008 (CPI 2003=100)
Source: Bloomberg Report on the Economics of Tobacco and Tobacco Taxation
in Turkey, 2010.
Changing consumers’ taste and increasing
purchasing power
100%
90%
100%
RUSSIAN FEDERATION
80%
70%
60%
90%
ECONOMY
48
68
70%
40%
40%
10%
54.4
ECONOMY
60%
50%
20%
25
80%
50%
30%
KAZAKHSTAN
MID PRICED
35
30%
46.3
MID PRICE
31.7
20%
21
PREMIUM
17
0% 6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: WHO calculations based on Euromonitor data.
10%
14.4
PREMIUM
29
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Changing consumers’ taste and increasing
purchasing power
100%
100%
BELARUS
90%
ECONOMY
80%
17%
41
79
50%
30%
1
20%
10%
14
6
HIGH PRICE
PREMIUM
70%
ECONOMY
60%
46%
40%
34%
30%
20%
10%
8
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: WHO calculations based on Euromonitor data.
34%
61%
50%
MID PRICE
40%
UKRAINE
80%
70%
60%
90%
MID PRICE
33%
PREMIUM
20%
6%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Changing consumers’ taste and increasing
purchasing power: Case of Kenya
100%
90%
80%
70%
67.3%
78.9%
60%
50%
40%
30%
20%
24.3%
14.6%
10%
8.4%
6.5%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Premiun
Source: WHO calculations based on Euromonitor data.
Mid-price
Economy
Summary
 Price and consumer disposable income are the two major
determinants of demand for tobacco products.
– Increase in price causes tobacco consumption to decrease
irrespective of the income status of countries.
– Increase in income leads to increase in tobacco consumption
particularly in low income settings.
 With growing income, consumers’ preference shift to
higher priced tobacco products.