Cross-price elasticity between licit and illicit cigarette consumption in Brazil

This paper estimates own- and cross-price elasticities of cigarette consumption in licit and illicit markets. Using propensity score matching (PSM), we pair comparable licit- and illicit-cigarette consumers to assign hypothetical prices and address the challenge of exclusive consumption of just one type. The analysis focuses on Brazil, a developing country with a significant illicit cigarette market, using individual data from the 2013 and 2019 National Health Surveys (PNS). Illicit market identification relies on declared brands and official minimum prices. Results show that cross-price elasticities indicate a switching demand effect following illicit cigarette price changes in 2013, but not in 2019. However, changes in licit cigarette prices do not significantly influence switching demand in either year or in the combined sample. Across all models, illicit cigarette consumers exhibit lower price sensitivity than their licit counterparts, highlighting distinct behaviors in response to market dynamics.