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.
- If the government increases the tax on e-cigarettes by $1, what happens to the optimal price and unit sales?
- Given your answer to (1) and presuming that the price of traditional cigarettes remains constant, what happens to unit sales of traditional cigarettes?
- 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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