The demand for cigarettes: new evidence from South Africa

Abstract

This paper estimates the price elasticity of demand for cigarettes in South Africa, a country that has currently experienced a transition in the cigarette market, from a near monopoly to a more competitive market structure. Based on longitudinal data drawn from the South Africa National Income and Dynamic Study (NIDS: 2008 - 2014), we compare the results of the conditional elasticity (random and fixed effect panel estimates) and total elasticity of demand (two-part model). Like previous evidence into cigarette prices, we obtain negative price elasticity of demand for cigarettes, with the total price elasticity significantly larger than the conditional elasticity. For the total elasticity, a 10% increase in price reduces cigarette consumption by 4.3% for the economy brands and 6.9% for the mid-price brands. However, we nd that over the same period, estimates from the fixed effect model are statistically insignifi cant. This is probably due to the limited within variation in both in cigarette consumption and cigarette prices. Thus, with between variation models, increased tobacco taxes can, in the presence of the changing market structure, remain a desirable policy tool for reducing cigarette consumption.