ISG: Cigarette demand in Indonesia with controls for cigarette quality

About the Seminar
Most studies of cigarette demand ignore quality variation. In general, consumers may respond to price rises by reducing quantity consumed, but also by downgrading the quality of what they consume. If each type of response is not allowed for, what is estimated as a price elasticity of quantity demand will combine the effects of quantity and quality adjustments. We distinguish between 16 brands of cigarettes in Indonesia, where prices of the dearest brands are over double those of the cheapest. Using Indonesian Family Life Survey data, we estimate individual level demand for cigarettes, comparing estimated own-price elasticities when brand-level controls for quality are included and when they are excluded (as in most prior studies). The own-price elasticity of quantity demand for cigarettes purchased is -0.82 if brand effects are ignored but is just -0.54 once the brand effects are used. There is a similar gap for the price elasticities of cigarettes smoked. We use these results to simulate a 10% rise in the excise tax and find that the effect of the tax hike in reducing the number of cigarettes smoked would be overstated by 56% if the brand-level controls for quality choice are not used.
About the speaker
Dr Susan Olivia is a Senior Lecturer in Economics at the University of Waikato, New Zealand. Her research interests are in development economics, applied microeconometrics, and machine learning. Much of her research uses large-scale administrative and survey data as well as geographic data, including satellite data. She has a PhD from the University of California, Davis. Susan is currently a visiting fellow with the ANU Indonesia Project. She will be on campus through 22 June 2024.
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