Thursday, February 13, 2020

The Demand for E-Cigarettes is Elastic

"We then calculate an e-cigarette own-price elasticity of -2.6 and a positive cross-price elasticity of demand between e-cigarettes and traditional cigarettes of 1.1, suggesting that e-cigarettes and traditional cigarettes are economic substitutes" (Cotti, Chad D. and Courtemanche, Charles and Maclean, Catherine and Nesson, Erik and Pesko, Michael and Tefft, Nathan, The Effects of E-Cigarette Taxes on E-Cigarette Prices and Tobacco Product Sales: Evidence from Retail Panel Data (January 2020). NBER Working Paper No. w26724. Available at SSRN: https://ssrn.com/abstract=3535316). 

Two questions.

  1. If the government increases the tax on e-cigarettes by $1, what happens to the optimal price and unit sales?
  2. Given your answer to (1) and presuming that the price of traditional cigarettes remains constant, what happens to unit sales of traditional cigarettes?
  3. What is the quick estimate of the price elasticity facing an individual seller if the market contains 4 sellers? "We calculate a Herfindahl–Hirschman Index of 0.251 for e-cigarette retail purchases".

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