The tobacco industry uses pricing to undermine tobacco tax policy: Evidence from Bangladesh
Publication Source

The International Tobacco Control Policy Evaluation Project

South-East Asia
Economy status
Lower-middle-income economies

The effectiveness of a tax increase in reducing tobacco use depends on the extent to which the industry passes on the tax to consumers. Evidence suggests that the tobacco industry may absorb or raise the price more than the tax increase (over-shift) depending on the brand segment of tobacco products. Very little is known about
the tobacco industry’s pricing strategy under a multi-tiered tax system with government-administered prices.
In this report, we examine the industry’s pricing strategy by price segment of the cigarette market in Bangladesh by observing the deviation between the market retail prices of cigarettes (i.e. those faced by consumers) and government-recommended prices that are used as tax base in the four ad valorem tax tiers.

Data on recommended retail prices by brands were collected from the National Board of Revenue. Data on market retail prices by brands were collected by the International Tobacco Control (ITC) Bangladesh Wave 3 Survey 2011-12 and Wave 4 Survey 2014-15.

We found that cigarettes manufacturers and retailers in Bangladesh charge market prices higher than the government recommended price for higher-price brands to extract extra profit margin from the high end of the price distribution while lowering the relative price of cheaper brands.

This strategy allows tobacco companies to attract more price sensitive smokers to buy cheaper brands and to
expand overall demand, while avoiding payment of tax on the extra profit margin derived from higher-price brands. The outcome of this differential pricing strategy is reflected in the volume growth of low-price brands by 12% and increase in the market share of low-price cigarette brands in total cigarette sales from 61.7% to 79.5%
between 2012 and 2016. Thus, the tobacco industry can maximize profit both from increasing the profit per unit
for higher-priced brands and expanding the market size of cheaper brands even at lower prices. The Bangladesh cigarette industry adopts a differential pricing strategy that encourages smokers to switch down to cheaper brands instead of quitting when tax and price increase, undermining the intended effect of tax policy change in reducing cigarette consumption and improving public health through reduction in smoking-related diseases and deaths.

Because this pricing strategy is supported by the existing tiered ad valorem excise tax structure for cigarettes,
it needs to be replaced with a uniform specific excise system, which would eliminate the opportunity to manipulate prices in this manner.