BLACKSBURG,VA July 6, 1999 - The decision by manufacturers to raise the price of cigarettes last year will have a significant impact on whether young people take up smoking and how much tobacco farmers grow in the future, according to a Virginia Tech study.
Cigarette manufacturers raised the price of a pack of cigarettes last November by 45 cents, to an average per-pack price of $2.40. That price increase, which is to finance last year's $206 billion legal settlement with state attorneys general, could eventually result in a 9 percent reduction in overall domestic cigarette consumption, according to the study.
"The abrupt increase in price in late 1998 is large and will amount to more than a 20 percent increase in inflation-adjusted prices from 1998 through 1999," the study by Virginia Tech Agricultural Economist Wayne D. Purcell says. "Such a large increase in price will significantly influence consumption."
An analysis of the relation of prices to consumption suggests the 20 percent price increase will eventually result in a 26 percent consumption decline among young people in coming years, the study says.
"Twenty-six percent is a large effect and suggests that the U.S. tobacco market will, in fact, be impacted in a very significant way by the price increase announced by the tobacco companies," Purcell says in the study. "The price increase is at unprecedented levels and will prompt long-term, cumulative reductions in domestic consumption."
Purcell expects various consumer groupings to respond to the 20 percent price increase differently. The largest group of cigarette buyers consists of older, habitual smokers, who will continue to smoke despite the higher costs.
It is with the segment consisting of younger people -- both young smokers, who have less firmly established habits and less money available, and young people who haven't started smoking -- where the price increase will significantly dampen cigarette consumption. A previous study showed the sensitivity of the youth segment of the cigarette market to price changes was about three times that of the adult segment.
"The price increase will have a major impact on smoking, especially by [potential] young smokers," the study says. "Generally, higher prices are expected to discourage youth from starting to smoke and would also be expected to reduce the rate of smoking after smoking has become a habit."
The study, Changing Prices, Changing Cigarette Consumption, tracks cigarette consumption from 1975. Domestic consumption reached a high of 640 million cigarettes in 1981. Public health education efforts began to whittle away at that demand to a low of 485 million cigarettes in 1993. The economic terrain of the cigarette industry shifted abruptly last year with the tobacco settlement. The agreement to limit litigation based on the health effects of smoking requires the industry to make payments averaging $8.4 billion over each of the next 25 years. The companies apparently have chosen to raise prices to meet that cost.
"The pricing strategy by the companies may be a very practical one," the study says. "Selling a smaller quantity of cigarettes domestically could actually raise total revenue to tobacco companies." This could happen because the percentage increase in price will be larger than the resulting percentage decline in quantity consumed.
Unless the expected domestic decline in consumption is offset by growth in the export market, the study says, tobacco growers could face still further decreases in tobacco quotas. The annual declines in the number of youths starting to smoke will eventually affect farmers in a major way, according to Purcell.
"The 1999 reduction in consumption [because young people do not start to smoke] may not be huge, but the cumulative effect by the year 2005 will be huge," the study says. "If the [quota] program is still in place, quota cuts beyond 2000 will likely bring further consolidation of farms and accentuate the exit of farms, especially small farms, from tobacco production."
The same effect can be expected from market forces if the quota system is abolished, Purcell says. The price domestic tobacco can command will sink to global price levels without the quota system. In such an environment, economies of size are likely to force small-scale producers out of business, resulting in fewer numbers of relatively large producers.
The study was sponsored by the Rural Economic Analysis Program (REAP) of Virginia Tech. For more information, visit: /www.reap.vt.edu/reap/
Researcher:
Wayne D. Purcell
540-231-7725 or purcell@vt.edu
will be available only through Thursday, July 8
PR CONTACT:
Stewart MacInnis
540-231-5863 macinnis@vt.edu
The study is available at: www.reap.vt.edu/reap/docs/pdf/policy10.pdf