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

Source: WHO calculations based on WHO, TMA and World Bank data, 2011

150155160165170175180185190195200

75

80

85

90

95

100

105

2002 2004 2006 2008 2010

Per c

apita

reta

il sale

Real

aver

age r

etail

price

per p

ack Kenya: low income (AFRO)

Real average retail price per pack KES (CPI 2010=100)

Per capita retail sale (pieces)




200

220

240

260

280

300

320

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

per c

apita

reta

il sa

le

Real

ave

rage

reta

il pr

ice

per p

ack

Côte d'Ivoire: Lower middle income (AFRO)

Real average retail price per pack US$ (CPI, 2000=100)





400

450

500

550

600

650

700

750

7.80

8.30

8.80

9.30

9.80

10.30

10.80

11.30

11.80

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Per c

apita

reta

il sa

les

Real

ave

rage

reta

il pr

ice

per p

ack

South Africa: Upper middle income (AFRO)

Real average retail price per pack of 20, Rands (CPI, 2000=100)

Per capita retail sales (pieces)




430

440

450

460

470

480

490

500

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1998 1999 2000 2001 2002 2003 2004 2005

Cons

umpt

ion

per c

apita

Real

ave

rage

pric

eMexico: Upper middle income (AMRO)

Real average price (USD) Consumption per capita (pieces)



Source: WHO calculations based on data from Tax Burden on Tobacco, 2011

0

500

1000

1500

2000

2500

3000

0.001.002.003.004.005.006.007.00

1980 1990 2000 2010

Real

pric

e pe

r pac

kUSA - High income (AMRO)

Real price per pack (USD, CPI 2011=100)Consumption (per capita), pieces



Source: WHO calculations based on data from Tax Burden on Tobacco, 2011.

400

500

600

700

800

900

1,000

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Per c

apita

reta

il sa

les (

piec

es)

Real

ave

rage

reta

il pr

ice

per p

ack Sweden: High income (EURO)

Real average retail price per pack US$ (CPI, 2000=100)

Per capita retail sales (pieces)

Cigarette price and adult smoking prevalence in USA

Cigarette Prices and Adult Smoking Prevalence, United States, 1970-2008

19

23

27

31

35

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Year

Pre

vale

nce

$1.25

$1.75

$2.25

$2.75

$3.25

$3.75

$4.25

Pri

ce (

2/09

do

llar

s

Prevalence PriceSource: Frank Chaloupka

Negative relationship between cigarette prices and adult smoking prevalence in USA, 2007

Cigarette Prices and Adult Prevalence, 50 States & DC, 2007

y = -1.7038x + 27.473R2 = 0.1756

11

13

15

17

19

21

23

25

27

29

$3.25 $3.75 $4.25 $4.75 $5.25 $5.75 $6.25

Price per Pack

Ad

ult

Pre

vale

nce

Source: Frank Chaloupka

Cigarette price and youth smoking prevalence, USA

Cigarette Price and Youth Smoking Prevalence, United States, 1991-2008

$2.25

$3.00

$3.75

$4.50

129.9 124.1 121 116.9 110.8 99.2 91.3 84.5 78.4

Year

Pri

ce p

er p

ack

(2/0

9 d

oll

ars)

6

11

16

21

26

31

36

Sm

oki

ng

Pre

vale

nce

Cigarette Price 12th grade prevalence 10th grade prevalence 8th grade prevalence

Source: Frank Chaloupka

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

Source: Kyaing, 2003.

-1.99

-1.23-1.08

-0.94 -0.86 -0.89

-2.5

-2

-1.5

-1

-0.5

015-24 25-34 35-44 45-54 55-64 65+

Smoking prevalence-0.42

-0.37-0.32 -0.32

-0.4

-0.28

-0.45-0.4

-0.35-0.3

-0.25-0.2

-0.15-0.1

-0.050

15-24 25-34 35-44 45-54 55-64 65+

Smoking intensity

Price elasticity by income/education/socioeconomic status

Source: Kinh et al., 2006.

-1.16

-0.59

-1.75

-0.94

-0.5

-1.44

-0.75

-0.4

-1.15

-1.8

-1.6

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0Smoking prevalence Smoking intensity Total

Viet Nam

Low income All High income

Price elasticity by price band

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0Economy Mid-price Premium

Price elasticity 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 Short-run elasticity

Long-run elasticity

Source

Turkey -0.21 -0.37 Tansel (1993) Brazil -0.11 to -0.35 -0.48 to -0.80 Da Costa e

Silva (1998) China -0.35 -0.66 Hu and Mao

(2002) Republic of Korea

-0.28 -0.35 Kim and Seldon (2004)

Chile -0.22 -0.45 Debrott and Sanchez (2006)

Decomposition of price responsiveness Country Elasticity of

smoking prevalence

Elasticity of smoking intensity

Total price elasticity

Source

United Kingdom -0.192 -0.370 -0.562 Jones (1989) China -0.213 -0.250 -0.463 Bishop et al (2007) Mexico -0.06 -0.45 -0.52 Jimenez-Ruiz et al.

(2008) Nepal -0.46 -0.42 -0.88 Karki et al. (2003) USA -0.193 -0.191 -0.374 Franz (2008) Canada -0.02 -0.41 -0.45 Gruber et al.

(2003) Republic of Korea -0.02 -0.64 -0.66 Chung et al.

(2007) Russia -0.106 -0.026 -0.132 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

Source: WHO calculations based on WHO, TMA and World Bank data, 2011.

150

160

170

180

190

200

40000

45000

50000

55000

60000

65000

70000

2002 2004 2006 2008 2010

Per c

apita

reta

il sa

le

GDP

per

cap

itaKenya: Low income

GDP per capita 2010 constant KES


Income: Positive relationship between income and consumption

Source: WHO calculations based on WHO, TMA and World Bank data, 2011.

0

10

20

30

40

50

60

70

80

90

100

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Cons

umpt

ion

per c

apita

Real

GDP

per

capi

taChina: Upper middle income

Real GDP per capita (USD)Consumption per capita (pack)

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.


6 PREMIUM 1721

MID PRICED 35

68

ECONOMY 48

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

RUSSIAN FEDERATION

14.4 PREMIUM 29

31.7MID PRICE

46.3

54.4ECONOMY

25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

KAZAKHSTAN

Source: WHO calculations based on Euromonitor data.

6 PREMIUM 814

HIGH PRICE34%1

MID PRICE

4179

ECONOMY17%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BELARUS

6% PREMIUM20%

33%

MID PRICE

46%

61%

ECONOMY34%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

UKRAINE



Changing consumers’ taste and increasing purchasing power: Case of Kenya

6.5% 8.4%14.6%

24.3%

78.9% 67.3%

0%10%20%30%40%50%60%70%80%90%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Premiun 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.

factors affecting consumer behavior of purchasing tobacco products

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