Tobacco Product Demand, Cigarette Taxes, and Market Substitution

This paper presents a model of estimated demand for four tobacco products: cigarettes, cigars, chewing tobacco, and smoking tobacco products. Own elasticities and cross-price elasticities are used to obtain insights into the effectiveness and implications of new policy measures. Of particular interest is whether substitution of various tobacco products varies by market outlet. Several variations of the tobacco product outlet-choice model were estimated using iterative SUR. Four separate product-specific models where also estimated and represent consumers’ choice of a retail market outlet to purchase a particular tobacco product. In contrast to the joint product-outlet choice model, the two stage budgeting model rests on the assumption that consumers first choose a tobacco product, and then choose where to purchase it. In addition to estimating overall demand for the four tobacco products, models are estimated for tobacco products from three specific outlets: grocery stores, drug stores, and convenience stores. The paper investigates whether the various outlets substitute or complement each other and briefly deals with the issue of the premium consumers pay when purchasing tobacco products at convenience stores.