The Demand for Cigarettes: New Evidence from South Africa

This paper estimates the price elasticity of demand for cigarettes in South Africa. Based on longitudinal data drawn from the South Africa National Income and Dynamic Study, we compare the results from the random and fixed effect panel estimation to estimates from the two-part model. We obtain negative price elasticity of demand for cigarettes, with significantly larger price elasticity estimates from the two-part model. The results suggest that a 10% increase in price reduces cigarette consumption by 4.3% for the economy brands and 6.9% for the mid-price brands. However, we find that over the same period, estimates from the fixed effect model are statistically insignificant. This is probably due to the limited within variation in both cigarette consumption and cigarette prices. Thus, with between variation models, increased tobacco taxes can, in the presence of the changing market structure, remain a desirable policy tool for reducing cigarette consumption.