Tobacco industry pricing strategies during recent tax adjustments in Mexico: evidence from sales data.

Abstract

Introduction: Previous studies have identified pricing strategies that the tobacco industry employs to try to minimise the impact of tobacco taxation, but these studies are mostly about high-income countries. This research examines industry price responses to a recent cigarette tax increase in Mexico, including in the capsule cigarette segment that has expanded rapidly in Latin America.

Methods: Data of cigarette prices and sales in Mexico between October 2018 and September 2021 licensed from NielsenIQ were used following a quasi-experimental design to analyse price changes after excise tax increases with fixed effect models by product. To explore heterogeneous responses, estimates were disaggregated by cigarette attributes such as presence of capsules and market segment. Differential shifting was also assessed.

Results: Increasing the tobacco tax from 2011MX$0.35(≈US$0.02) to 2020 MX$0.4944(≈US$0.0283) in January 2020 was associated with an overall 8% cigarette price increase in real terms. However, some cigarette types, including premium to discount segments, exhibited price increases larger than the tax increase, which reduced the relative price of ultra-low-priced cigarettes. Instead of a single hike, prices were gradually raised throughout the first months of 2020 for all cigarette types. A combination of both pricing strategies was employed for capsule cigarettes. The 2021 smaller tax adjustment for annual inflation was fully passed onto consumer, maintaining real prices constant.

Conclusions: The industry's ability to raise prices more than the tax increase and manage these price increases smoothly suggests that there was room for larger tobacco tax increases in Mexico. Future developments on tobacco taxes could consider a fully specific tax structure or minimum taxes to mitigate the adverse effects of market segmentation and differential shifting.