Quantity, quality, and regional price variation of cigarettes: Demand analysis based on a household survey in China

This paper investigates the price elasticity of cigarettes using an urban household survey in China. We find that cigarette price is an important determinant of smoking. In our two-part model, the overall price elasticity is − 0.82. Nevertheless, tobacco demand is influenced by both price and quality. We net out the quality effect of tobacco demand to obtain standard price elasticities, which are between − 0.70 and − 0.35. In addition, when we estimate two demand systems of Chinese households, the estimated own-price elasticities of cigarettes are − 0.57 and − 0.81. These elasticities suggest that if the tobacco excise tax rate goes up, cigarette consumption will drop rapidly, and government revenue from the tobacco tax will increase.

Research Highlights► This paper uses several methods to analyze price elasticity of tobacco comprehensively. ► This paper considers the endogeneity issue and net out the quality effect of tobacco demand to obtain standard price elasticity of tobacco consumption. ► The overall price elasticity estimated indicates that Chinese households will response substantially to tobacco tax adjustment.