Duke 2008 | ASHE | Equity and Efficiency in Health and Healthcare

In this paper we investigate how firms target price discount coupons for cigarettes and smoking cessation products, two products that substitute for each other. Most previous studies have ignored the complexities of cigarette pricing, instead focusing more narrowly on the question of whether and how much an individual smokes. Thus, little is known about how cigarette manufacturers market their products. We examine price-discounting both as a function of demographic characteristics in particular markets and as a behavioral response to two demand shifters: changes in cigarette tax rates and unemployment rates. We use product-level price and quantity data from AC Nielsen for the years 1995-2007, brand-level coupon data for the years 1996-2005 from Marx Promotion Intelligence, and market-level unemployment and excise tax data to estimate the effect of changes in tax and unemployment rates on coupon issues. Our model is based on Nevo & Wolfram's (2002) empirical investigation of couponing behavior in the breakfast cereal industry. As in the case of the market they examine, the cigarette industry is characterized by a small number of firms (4) selling a large number of brands and offering substantial numbers of price discounts through couponing. We extend their model to examine couponing for smoking cessation products, which are substitutes for cigarettes. We will also take into account the different strategies that may be used for premium and generic brands of cigarette, and the ways in which coupons may be offered to demographic groups with different price elasticities.

According to the Centers for Disease Control, 43 percent of the $11.2 billion cigarette companies spent on advertising and promotion in 2001 was devoted to promotions such as 'buy one pack, get one free' campaigns (CDC 2005). An additional $602 million were spent on coupons for discounted cigarettes. The Federal Trade Commission (FTC) estimates that, between 1997 and 2001, tobacco industry advertising and promotion expenditures nearly doubled (FTC 2005). While less information is available on price discounting of smoking cessation products, it also appears to be a growing market. Additionally, reviews of internal tobacco industry documents suggest that cigarette manufacturers carefully consider who is demographically most likely to quit and that the industry devotes considerable resources to try to keep these smokers from quitting or to get recent quitters to restart (Ling and Glantz 2004; Chaloupka et al. 2002). Thus, coupons represent an important part of cigarette companies' marketing strategies, and should be taken into account in studies of the effect of price on individual smoking behavior.