The tobacco industry uses pricing to undermine tobacco tax policy: Evidence from Bangladesh | Dec 2018 | English
The effectiveness of a tax increase in reducing tobacco use depends on the extent to which the industry passes on the tax to consumers. This study examined 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.
The findings show 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.
This pricing strategy is supported – even amplified – by the tiered ad valorem excise structure that has been in place in Bangladesh for the past two decades. The government should replace the tiered ad valorem tax structure with a uniform specific excise system. The government also needs to withdraw its control over setting cigarette prices by allowing the market to determine them.