A cunning plan

A new paper by a team at the University of Bath is calling for a 'maximum price-cap' on cigarettes.

The price of a pack of 20 cigarettes in the UK currently varies by as much as £5, with premium brands costing in excess of £14 a pack.

Superficially a maximum price-cap sounds like a good deal for consumers but there has to be a catch, doesn't there?

Here's my interpretation.

Profit margins on premium brands effectively subsidise the cheapest brands. Introducing a price cap will hit the tobacco companies' profits and will force them to increase the price of the cheaper brands.

This in turn will hurt the less well-off smoker who will be forced to pay more for their cigarettes or quit, and it's the latter option the anti-smoking industry is aiming for.

In fact the report's authors make no bones about it because according to the study (‘Where to next for countries with high tobacco taxes? The potential for greater control of tobacco pricing through licensing regulation’):

The introduction of a maximum price-cap for cigarettes sold in the UK would limit tobacco companies’ ability to fix prices and would help to cut smoking rates, according to a new study from a team at the University of Bath.

I'm no economist but this is Forest's response which has been included in the Press Association report that appears on the Independent website (Introduce price cap on cigarettes to reduce smoking – study) and elsewhere:

"By reducing the number of price points, a price cap on cigarettes would be yet another attack on consumer choice. Worse, it would almost certainly lead to further increases in the cost of lower priced brands.

"This would not only discriminate against smokers who are less well off, it could drive many more consumers to the unregulated black market where criminal gangs will sell cigarettes to anyone, including children."

The same PA report has been tweaked and appears with a different headline here – Fixed price for cigarettes could help cut smoking, study says.

I'm not sure where they got the fixed price idea from but the sub-heading is interesting – 'The Government could decide how much everyone pays for a packet'.

I'll have to read the University of Bath study in full but perhaps that's the endgame. Take away the tobacco companies' ability to compete with one another (on price) and give the government full control over the cost of tobacco.

Either way the biggest loser will be the vast majority of consumers, which is obviously the cunning plan.

See: Sticking a price cap on cigarettes would stop people taking up smoking by forcing tobacco companies to push up prices of cheaper items, experts say (Mail Online)

Update: it seems the price cap idea is nothing new. Indeed, tobacco control researchers at the University of Bath have been pushing it for some time.

Back in 2013 J Robert Branston and Anna Gilmore published 'The case for Ofsmoke: The potential for price cap regulation of tobacco to raise £500 million per year in the UK'.

I'm not sure I fully grasp it but here's a summary of their objective, methods, results and conclusions:

Objective: A system of price-cap regulation has previously been suggested to address the market failure inherent to the tobacco industry. This would benefit public health directly (eg, by making it extremely difficult for the industry to sell cut-price cigarettes, or use price as a marketing strategy) and indirectly (eg, by reducing the available money the industry has for spending on marketing and lobbying). This paper explores the feasibility of applying such a scheme in the UK.

Methods: The impact of price-capping is modelled using optimistic and conservative scenarios, each with different assumptions, and using 2009 and 2010 profit data for the major companies selling tobacco in the UK. The models are used to calculate by how much would profit be reduced through the imposition of price caps, and thus, how much revenue could be raised in additional taxes, assuming the end price the consumer pays does not change.

Results: Tobacco companies enjoy massive profit margins, up to 67%, in the UK. The optimistic scenario suggests a potential increase in UK tobacco tax revenue of £585.7 million in 2010 (£548.4 million in 2009), while the conservative model suggests an increase in revenue of £433.6 million in 2010 (£399.2 million in 2009). This would be approximately enough to fund, twice over, UK-wide anti-tobacco smuggling measures, and smoking cessation services in England, including the associated pharmacotherapies, to help people stop smoking.

Conclusions: Applying a system of price-cap regulation in the UK would raise around £500 million per annum (US$750 million). This is likely to be an underestimate because of cautious assumptions used in the model. These significant financial benefits, in addition to the public health benefits that would be generated, suggest this is a policy that should be given serious consideration.

You can download the full paper here.

Just goes to show that even bad ideas never die.