Tobacco industry pricing strategies during recent tax adjustments in

The Evolving Landscape of Cigarette Pricing

The tobacco industry has long been known for its strategic pricing tactics aimed at minimizing the impact of tax increases on cigarette sales. While much of the existing research on these tactics has focused on high-income countries, the recent tax adjustments in Mexico provide an insightful case study on how the industry navigates pricing in a middle-income market.

Differential Shifting and Price Smoothing

Our analysis of cigarette price data in Mexico from October 2018 to September 2021 reveals two key pricing strategies employed by the tobacco industry in response to the 2020 and 2021 tax increases:

1. Differential Shifting: Rather than uniformly passing along the tax hikes, the industry exhibited heterogeneous price responses across different cigarette segments. Some product types, including premium and discount brands, saw price increases that exceeded the tax rise, effectively reducing the relative price of ultra-low-cost cigarettes. This differential shifting allowed the industry to maintain affordability for price-sensitive consumers while extracting greater revenue from other market segments.

2. Price Smoothing: Instead of immediate, large price adjustments, the industry gradually raised prices over the first few months of 2020. This price smoothing approach enabled a more gradual transition for consumers, potentially dampening the impact on cigarette demand.

Interestingly, the industry employed a combination of these two strategies for the rapidly growing capsule cigarette segment in Mexico. The ability to temporarily absorb the tax increase and then strategically raise prices beyond the necessary level suggests that the Mexican government could have implemented larger tax hikes while still achieving the desired public health outcomes.

Implications for Tobacco Control Policy

The findings from Mexico highlight several important considerations for policymakers aiming to use taxation as an effective tobacco control measure:

1. Countering Market Segmentation: The emergence of an ultra-low-priced cigarette segment, driven by small producers willing to absorb tax increases, provides opportunities for consumers to “trade down” rather than quit. Adopting a fully specific tax structure or implementing minimum excise taxes, as seen in the UK, could help mitigate this adverse effect.

2. Addressing Illicit Trade: The widening price gap between licit and illicit cigarettes raises the risk of increased illicit trade. Comprehensive strategies to control and prevent illicit trade should be a parallel priority alongside tobacco tax increases.

3. Considering Taxation of Single Sticks: The study was unable to analyze pricing for single stick cigarette sales, which are prevalent in Mexico. Future research should explore whether pricing strategies differ for this alternative sales format, as observed in a recent study from Colombia.

Overall, the tobacco industry’s ability to strategically manage pricing in response to tax changes in Mexico underscores the need for policymakers to adopt a comprehensive, evidence-based approach to tobacco taxation. Larger, more frequent tax increases, combined with measures to address market segmentation and illicit trade, can help ensure that the full public health benefits of tobacco taxation are realized.

The Rapid Rise of Capsule Cigarettes

One of the notable trends observed in the Mexican cigarette market is the rapid expansion of capsule cigarettes, which allow consumers to customize the flavor of their smoking experience. This product innovation has been a key focus for the tobacco industry in recent years, with major manufacturers leveraging capsule technology to attract new and younger consumers.

Pricing Tactics for Capsule Cigarettes

Our analysis reveals that the industry employed a combination of pricing strategies for capsule cigarettes in response to the tax increases:

• Differential Shifting: Capsule cigarettes, which are often marketed in the medium or premium price tiers, exhibited price increases that exceeded the tax rise. This allowed the industry to maintain the perception of value and premium features while increasing profit margins.

• Price Smoothing: Similar to the broader cigarette market, the industry gradually raised prices for capsule cigarettes over the first few months of 2020, rather than implementing a single, large hike.

The industry’s ability to utilize both differential shifting and price smoothing for this rapidly growing product segment suggests a high degree of strategic pricing sophistication. By carefully managing the price points, the industry was able to minimize the impact of the tax increase on capsule cigarette affordability and accessibility.

Implications for Tobacco Control

The rapid expansion of capsule cigarettes, coupled with the industry’s pricing tactics, presents a significant challenge for tobacco control efforts in Mexico and beyond. Policymakers must consider the following:

1. Adapting Tax Structures: Traditional cigarette tax policies may need to be reconsidered to address the unique pricing dynamics of capsule and other innovative tobacco products. Fully specific tax structures or minimum excise taxes could help ensure that tax increases are fully passed on to consumers.

2. Strengthening Regulatory Oversight: Closer monitoring and regulation of product innovations, such as capsule cigarettes, can help prevent the industry from exploiting regulatory loopholes to undermine the public health objectives of tobacco taxation.

3. Enhancing Public Education: Educating consumers about the health risks and pricing tactics associated with capsule and other novel tobacco products can empower individuals to make more informed choices and resist industry marketing strategies.

By staying vigilant to the industry’s evolving pricing tactics and adapting policy approaches accordingly, policymakers can maximize the public health impact of tobacco taxation and combat the rise of new, potentially more addictive and harmful cigarette products.

Leveraging Tobacco Taxation for Public Health

The tobacco industry’s strategic pricing responses to recent tax adjustments in Mexico highlight the critical need for policymakers to adopt a comprehensive, evidence-based approach to tobacco taxation. While the industry’s ability to manage price increases may have limited the full impact of the tax hikes, the findings from this research provide valuable insights to strengthen future tobacco control efforts.

Recommendations for Policymakers

Based on the insights from the Mexican case study, policymakers should consider the following recommendations:

1. Implement Larger, More Frequent Tax Increases: The industry’s capacity to absorb and strategically shift the tax burden suggests that there was room for more substantial tax increases in Mexico. Bolder, more frequent tax hikes can help overcome the industry’s pricing tactics and maximize the public health benefits of tobacco taxation.

2. Adopt a Fully Specific Tax Structure or Minimum Excise Taxes: Measures to counter market segmentation and differential pricing, such as a fully specific tax or minimum excise taxes, can help mitigate the adverse effects of the industry’s pricing strategies and ensure that tax increases are fully passed on to consumers.

3. Strengthen Illicit Trade Control Measures: Alongside tobacco tax increases, comprehensive strategies to control and prevent illicit trade must be a parallel priority. The widening price gap between licit and illicit cigarettes raises the risk of increased illicit consumption, undermining the public health objectives of taxation.

4. Expand Research on Pricing Tactics for Alternative Tobacco Products: Future research should explore pricing strategies for alternative tobacco products, such as single stick cigarette sales, which were not captured in this study. Understanding the industry’s tactics across all product formats can inform more effective taxation and regulatory policies.

By adopting a holistic, evidence-based approach to tobacco taxation and control, policymakers can harness the power of this critical public health intervention to drive down smoking prevalence, prevent initiation, and improve population health outcomes.

Conclusion

The tobacco industry’s strategic pricing responses to recent tax adjustments in Mexico highlight the need for policymakers to remain vigilant and adapt their approaches to tobacco taxation. While the industry’s ability to manage price increases may have limited the full impact of the tax hikes, the insights from this research can inform more effective tobacco control strategies moving forward.

By implementing larger, more frequent tax increases, adopting comprehensive measures to address market segmentation and illicit trade, and expanding research to capture the evolving industry tactics, policymakers can maximize the public health benefits of tobacco taxation. Staying ahead of the industry’s pricing sophistication is crucial to achieving meaningful and sustainable reductions in smoking prevalence and improving population health outcomes.