Understanding Tobacco Industry Pricing, Profits, and Taxation in Low- and Middle-Income Countries

: (Alternative Format Thesis)

Abstract

Tobacco is the leading preventable cause of morbidity and mortality. Tax induced price increases of tobacco products is the most effective way of reducing their affordability and hence their consumption and related morbidities. It is also as well as an efficient source of increasing government tax revenues. However, the success of tax is largely dependent on the extent to which it is passed onto the consumers in the form of higher prices. Past research has found the Tobacco Industry (TI) undermines the impact of taxation by using several targeted pricing strategies. However, such evidence is largely focussed on high-income countries (HIC) and so little is known about the use of such strategies in the context of Low-and Middle-Income Countries (LMIC). This thesis therefore aims to understand the TI’s price-based responses to taxation in LMICs and to provide appropriate policy recommendations to address such actions.

This thesis comprises of four substantive research papers and an additional commentary paper and draws upon 3 broad methodologies. Paper 1 uses the first methodology which is a systematic review of the literature examining the global evidence of the TI’s pricing strategies in response to taxation thus establishing a baseline. Papers 2 and 3 draw upon a quantitative study design where the size of a tax change is compared to the resulting price change looking at the brands segments in the market, the behaviour of the tobacco companies and cigarette stick versus the packs. Different sources of cigarette pricing and taxation data are analysed to calculate the rate of tax pass-through and percentage change in net prices to identify the different pricing strategies that are being used by the industry in responses to increase in excise taxes in two different LMIC settings: Colombia and then 12 Sub-Saharan African (SSA) countries. Finally, in order to oppose higher taxation, the TI frequently uses the argument that it leads to increases in the illicit tobacco trade (ITT), and often constructs alternative narratives by exaggerating the scale of the ITT to influence policy-decisions. To explore this further the final research study i.e., Paper 5 uses a qualitative approach to conduct content analysis of newspaper articles to explore the extent to which TI’s sourced data are featured in Pakistan’s media coverage on the ITT.

The results of the review suggested that the industry uses six broad pricing strategies worldwide to balance enhancing revenues with maintaining its market volume these include: differential tax shifting; introducing new brands, segments, or products; price discrimination and price-related promotions; price smoothing; shrinkflation; and changing product attributes or production processes. The findings of the two specific pricing studies are in line with the review, and found the industry employed two of the identified strategies in Colombia (differential tax shifting and introducing new brands/sub-brands in the market) and one in SSA (differential shifting of taxes) in response to tax increase on cigarettes packs and individual-sticks. In Colombia the industry overshifted taxes when tax increases were smaller and predictable but used undershifting more when there was a larger increase in tax. Whereas in Southern Africa the TI primarily overshifted taxes in Botswana, Madagascar, Tanzania, and Zimbabwe while undershifted in rest of the 12 countries. For single sticks in Colombia, prices increased more than the tax increase along with an increase in their consumption. However, in African countries tax increases on sticks were absorbed in almost all of the cases examined. Pricing strategies for the various transnational tobacco companies and domestic producers examined in Paper 4 showed that they were broadly similar however the changes in net prices for domestic cigarettes were larger as compared to the transnational ones. Results of the studies on the TI’s media narratives demonstrate there were multiple instances of the ITT being used by the TI funded sources in newspaper articles as an argument to oppose tax policies in Pakistan.

The findings provide new evidence on the TI’s conduct in LMICs, specifically in responses to proposed and actual tobacco tax increases, which is crucial given the large number (> 80%) of smokers residing in these countries. The thesis significantly contributes to research, as the review is the only study in our knowledge that systematically assesses the global literature on TI’s pricing response to taxation. the two pricing studies were the first anywhere in the world to explore the pricing of individual-sticks and the pricing-behaviours of different tobacco companies (both domestic and transnational). Furthermore, the study on TI’s manipulation is the first to systematically extract narratives about ITT from media articles and the largest such exploration within a country’s media that has been undertaken to date. It improves wider understanding on the topic so that such TI actions can be routinely identified, highlighted, and therefore addressed in such markets.

Date of Award	23 Nov 2023
Original language	English
Awarding Institution	University of Bath
Sponsors	Cancer Research UK
Supervisor	Rob Branston (Supervisor) & Anna Gilmore (Supervisor)