title: How Do Smokers Respond to Cigarette Taxes? Evidence from China's Cigarette Industry.
abstract: This paper examines how Chinese smokers respond to tax-driven cigarette price increases by estimating a discrete choice model of demand for differentiated products, using annual nationwide brand-level cigarette sales data in China from 2005 to 2010. We allow for substitution between different cigarette brands and also incorporate key features of rational addiction theory into the model. Results show that the average own-price elasticity of demand for cigarettes at the brand level is -0.807, and the overall price elasticity of cigarettes at the market level is -0.488 in China. We find tax-induced substitution toward low-price cigarettes as well as high-tar cigarettes and that tax hikes encourage within-class substitution more than across-class substitution. These results have important policy implications for the potential effects of cigarette taxation. Copyright © 2014 John Wiley & Sons, Ltd.
authors.affiliation: China Economics and Management Academy, Central University of Finance and Economics, Beijing, China.
authors.forename: Hong
authors.initials: H
authors.lastname: Liu
authors.affiliation: Department of Economics and Department of Preventive Medicine, Stony Brook University, Stony Brook, USA.
authors.forename: John A
authors.initials: JA
authors.lastname: Rizzo
authors.affiliation: School of International Business Administration, Shanghai University of Finance and Economics, Shanghai, China.
authors.forename: Qi
authors.identifier: http://orcid.org/0000-0003-2222-6505
authors.initials: Q
authors.lastname: Sun
authors.affiliation: School of International Business Administration, Shanghai University of Finance and Economics, Shanghai, China.
authors.forename: Fang
authors.initials: F
authors.lastname: Wu
keywords: D42; H22; I10; cigarette demand; cigarette tax; discrete choice models; substitution