Price increase causes fewer sales of factory-made cigarettes and higher sales of cheaper loose tobacco in Germany

Aim of this study is the analysis of the price responsiveness of demand for cigarettes and loose tobacco in Germany over the period 1991-2006. In this period the average consumption of all kinds of cigarettes per capita (German population >= 15 years) declined from 634 pieces/quarter to 457pieces/quarter (-28%). Consumption of factory-made cigarettes decreased from about 545 pieces/quarter to 330 pieces/quarter in 2006 (-39%). In the same time consumption of self-made cigarettes increased from 89 pieces/quarter to 127 pieces/quarter (+42%). A one Euro Cent increase in price is associated with 28 cigarettes of all kinds consumed less per quarter. Data indicate that the different types of cigarettes are substitutes, e.g. there is evidence for a positive relationship between the price of factory-made cigarettes and the consumption of hand-made cigarettes. Thus, the increase in such consumption is rather driven by a positive cross-price effect of 17.01. Data indicate additionally an overall decrease in the cigarette consumption and a partial switch to cheaper loose tobacco. The availability of low-taxed loose tobacco may undermine the public health benefits of higher cigarette prices. Price differentials between tobacco products should be reduced in order to maximize the public health benefits of high cigarette prices. Copyright (c) 2007 John Wiley & Sons, Ltd.