Cross-price elasticities of cigarettes, heated tobacco products and e-cigarettes in South Korea: evidence for tobacco tax policy design.

BACKGROUND: The diversification of the tobacco market with the emergence of heated tobacco products (HTPs) and electronic cigarettes (e-cigarettes) poses new challenges for tobacco taxation and regulation. In South Korea, regulatory gaps in the legal definition of tobacco have resulted in heterogeneous tax treatment across products, raising concerns about unintended substitution effects. This study examines substitution and complementarity among major tobacco products to inform more coherent taxation strategies. METHODS: We employed the Almost Ideal Demand System model using data from the Korea National Health and Nutrition Examination Survey combined with supplementary market and survey data. Own-price, cross-price and income elasticities were estimated for conventional cigarettes, HTPs and e-cigarettes. RESULTS: E-cigarettes exhibited the highest own-price elasticity, indicating greater sensitivity to price changes. Cross-price elasticity estimates indicate substantial substitution between e-cigarettes and conventional cigarettes. Cross-price elasticity estimates indicate that increases in e-cigarette prices are associated with expenditure reallocation towards conventional cigarettes. HTPs showed the highest income elasticity, suggesting demand is more sensitive to income changes. CONCLUSIONS: Taxation frameworks that do not account for substitution across tobacco products risk encouraging product switching rather than reducing overall tobacco consumption. Tobacco tax policies should encompass all nicotine-containing products and explicitly consider cross-price elasticities to avoid unintended policy outcomes.