Price Smoothing Behavior of Cigarette Firms in Indonesia
Abstract
Research Originality: This research analyzes the price-smoothing behaviors of cigarette firms across various cigarette types, firm classifications, and government policies by using quarterly data at the brand level.
Research Objectives: This research aims to identify the price-smoothing tendencies of cigarette firms in Indonesia by analyzing the change in market retail price across various cigarette types and firm classifications and the impact of government policies.
Research Methods: This research used quarterly market retail price survey data covering all cigarette brands available in Indonesia from March 2014 to June 2021. The System Generalized Method of Moments (System GMM) was identified as the optimal estimation method.
Empirical Results: The results showed that cigarette firms in Indonesia employed price-smoothing strategies in response to implementing the tariff increase policy. Notably, substantial price increases tend to occur in December, immediately following the announcement of the tariff increase policy. Removing one of the ceiling price criteria has led to an increase in the average price of cigarettes within the specified criteria. The implementation of a minimum price had no significant impact on price changes.
Implications: This study's findings suggest that to address the issue of rising smoking prevalence, the government should consider implementing a more substantial tariff increase to counteract the impact of price-smoothing.
JEL Classification: H24, H31, H32, I18
Keywords
References
Adrison, V., & Dauchy, E. (2023). The Impact of Tax and Price Reforms on Companies’ Prices in A Complex Cigarette Tax System. Applied Economics, 56(1), 1-20. https://doi.org/10.1080/00036846.2023.2289905.
Amalia, B., Astuti, P. A. S., & Cohen, J. E. (2024). Five Years of Discourse Related to Indonesia Tobacco Control Reform: A Content Analysis of Online Media Coverage. Tobacco Control, 0, 1-8, tc-2024-058661. https://doi.org/10.1136/tc-2024-058661.
Atuk, O., & Özmen, M. U. (2017). Firm Strategy and Consumer Behaviour Under a Complex Tobacco Tax System: Implications for The Effectiveness of Taxation on Tobacco Control. Tobacco Control, 26(3), 277–283. https://doi.org/10.1136/tobaccocontrol-2015-052808.
Bayly, M., Scollo, M., & Wakefield, M. A. (2021). Evidence of Cushioning of Tobacco Tax Increases in Large Retailers in Australia. Tobacco Control, 31, 671-674. https://doi.org/10.1136/tobaccocontrol-2020-056385.
Becker, G. S., & Murphy, K. M. (1988). A Theory of Rational Addiction. The Journal of Political Economy, 96(4), 675-700. https://doi.org/10.4159/9780674020658-004.
Chaloupka, F. J., Hu, T. W., Warner, K. E., R, J., & Yurekli, A. (2000). The Taxation of Tobacco Products. In Jha, F. C. P. (Ed.), Tobacco Control Policies in Developing Countries, 474–476. New York: Oxford University Press.
Chaloupka, Frank J., Straif, K., & Leon, M. E. (2011). Effectiveness of Tax and Price Policies in Tobacco Control. Tobacco Control, 20(3), 235–238. https://doi.org/10.1136/tc.2010.039982.
Forster, M., & Jones, A. M. (2001). The Role of Tobacco Taxes in Starting and Quitting Smoking: Duration Analysis of British Data. Journal of The Royal Statistical Society. Series A: Statistics in Society, 164(3), 517–547. https://doi.org/10.1111/1467-985X.00217.
Golden, S. D., Farrelly, M. C., Luke, D. A., & Ribisl, K. M. (2016). Comparing Projected Impacts of Cigarette Floor Price and Excise Tax Policies on Socioeconomic Disparities in Smoking. Tobacco Control, 25, i60–i66. https://doi.org/10.1136/tobaccocontrol-2016-053230.
Gordon, B. R., & Sun, B. (2015). A Dynamic Model of Rational Addiction: Evaluating Cigarette Taxes. Marketing Science, 34(3), 452–470. https://doi.org/10.1287/mksc.2014.0885.
Hiscock, R., Branston, J. R., McNeill, A., Hitchman, S. C., Partos, T. R., & Gilmore, A. B. (2018). Tobacco Industry Strategies Undermine Government Tax Policy: Evidence From Commercial Data. Tobacco Control, 27(5), 488–497. https://doi.org/10.1136/tobaccocontrol-2017-053891.
Hyland, A., Bauer, J. E., Li, Q., Abrams, S. M., Higbee, C., Peppone, L., & Cummings, K. M. (2005). Higher Cigarette Prices Influence Cigarette Purchase Patterns. Tobacco Control, 14(2), 86–92. https://doi.org/10.1136/tc.2004.008730.
International Agency for Research on Cancer. (2011). Effectiveness of Tax and Price Policies in Tobacco Control. In IARC Handbooks of Cancer Prevention: Tobacco Control, 14 (3). Lyon: International Agency for Research on Cancer.
Lee, J. M. (2008). Effect of A Large Increase in Cigarette Tax on Cigarette Consumption: An Empirical Analysis of Cross-Sectional Survey Data. Public Health, 122(10), 1061–1067. https://doi.org/10.1016/j.puhe.2007.12.013.
Li, J., Newcombe, R., Guiney, H., & Walton, D. (2017). Impact on Smoking Behavior of The New Zealand Annual Increase in Tobacco Tax: Data for the Fifth and Sixth Year of Increases. Nicotine & Tobacco Research: Official Journal of the Society for Research on Nicotine and Tobacco, 19(12), 1491–1498. https://doi.org/10.1093/ntr/ntw233.
Liber, A. C., Ross, H., Omar, M., & Chaloupka, F. J. (2015). The Impact of The Malaysian Minimum Cigarette Price Law: Findings From The ITC Malaysia Survey. Tobacco Control, 24, ii83-iii87. https://doi.org/10.1136/tobaccocontrol-2014-052028.
Linegar, D. J., & Van Walbeek, C. (2018). The Effect of Excise Tax Increases on Cigarette Prices in South Africa. Tobacco Control, 27(1), 65–71. https://doi.org/10.1136/tobaccocontrol-2016-053340.
Marsh, L., Cameron, C., Quigg, R., Hoek, J., Doscher, C., McGee, R., & Sullivan, T. (2016). The Impact of An Increase in Excise Tax on The Retail Price of Tobacco in New Zealand. Tobacco Control, 25(4), 458–463. https://doi.org/10.1136/tobaccocontrol-2015-052259.
Nargis, N., Hussain, A. K. M. G., Goodchild, M., Quah, A. C. K., & Fong, G. T. (2020). Tobacco Industry Pricing Undermines Tobacco Tax Policy: A Tale From Bangladesh. Preventive Medicine, 132, 105991. https://doi.org/10.1016/j.ypmed.2020.105991.
Partos, T. R., Hiscock, R., Gilmore, A. B., Branston, J. R., Hitchman, S., & McNeill, A. (2020). Impact of Tobacco Tax Increases and Industry Pricing on Smoking Behaviours and Inequalities: A Mixed-Methods Study. Public Health Research, 8(6), 1–140. https://doi.org/10.3310/phr08060.
Prasetyo, B. W., & Adrison, V. (2020). Cigarette Prices in A Complex Cigarette Tax System: Empirical Evidence From Indonesia. Tobacco Control, 29(6), 618–623. https://doi.org/10.1136/tobaccocontrol-2018-054872.
Rogeberg, O. (2020). The Theory of Rational Addiction. Addiction, 115(1), 184–187. https://doi.org/10.1111/add.14822.
Ross, H., Blecher, E., Yan, L., & Cummings, K. M. (2011). Predictors of What Smokers Say They Will Do in Response to Future Price Increases. Findings From The International Tobacco Control (ITC) Four Country Survey. Nicotine & Tobacco Research, 13(6), 419-425. https://doi.org/10.1093/ntr/ntr015..
Ross, H., Blecher, E., Yan, L., & Hyland, A. (2011). Do Cigarette Prices Motivate Smokers to Quit? New Evidence From The ITC Survey. Addiction, 106(3), 609–619. https://doi.org/10.1111/j.1360-0443.2010.03192.x.
Ross, H., Tesche, J., & Vellios, N. (2017). Undermining Government Tax Policies: Common Legal Strategies Employed by The Tobacco Industry in Response to Tobacco Tax Increases. Preventive Medicine, 105, S19–S22. https://doi.org/ 10.1016/j.ypmed.2017.06.012.
Saenz-de-Miera, B., Welding, K., Tseng, T.-Y., Grilo, G., & Cohen, J. E. (2024). Tobacco Industry Pricing Strategies During Recent Tax Adjustments in Mexico: Evidence from Sales Data. Tobacco Control, 0: 1-7. https://doi.org/10.1136/tc-2024-058711.
Sheikh, Z. D., Branston, J. R., & Gilmore, A. B. (2021). Tobacco Industry Pricing Strategies in Response to Excise Tax Policies: A Systematic Review. Tobacco Control, 31(2), 1–12. https://doi.org/10.1136/tobaccocontrol-2021-056630.
Showalter, M. H. (1999). Firm Behavior in a Market With Addiction: The Case of Cigarettes. Journal of Health Economics, 18(4), 409–427. https://doi.org/10.1016/S0167-6296(99)00006-5.
Tauras, J. A., & Chaloupka, F. J. (1999). Determinants of Smoking Cessation: an Analysis of Young Adult Men and Women. Nber Working Paper Series..
World Health Organization. (2020). Raising Tobacco Taxes and Prices for a Healthy and Prosperous Indonesia. Geneva: World Health Organization.
Zheng, R., Marquez, P. V., Ahsan, A., Hu, X., & Wang, Y. (2018). Cigarette Affordability in Indonesia: 2002-2017. Washington: World Bank.
DOI: 10.15408/sjie.v13i2.40957
Refbacks
- There are currently no refbacks.
