Impact of cigarette “price wars” in Ukraine and Moldova

Abstract

Introduction In October 2015, tobacco corporations arranged “price wars” in Ukraine by decreasing maximum retail cigarette prices, while specific excise was increased by 40% since January 2016. In Moldova, the industry decreased prices of some brands by 20-30% in December 2014, when government presented plans to increase excises. We estimate price wars' impact on tobacco consumption and revenue. Material and Methods Monthly data on cigarette prices, excise revenues, and cigarette sales were collected and analyzed. Results In October 2015–February 2016, average cigarette prices in Ukraine decreased by 11%. For some brands, total tax exceeded the price. Despite increased excise, price wars made cigarettes cheaper, consequently, their sales increased. Price wars were beneficial for the governmental excise revenue because Ukraine applies an excise system with a minimum specific tax floor. In 2016, tobacco excise revenue was 49% higher than in same period of 2015, while excise rate increased by 40%. In Moldova, in the first quarter of 2015 average cigarette prices decreased by 9% and the excise revenue declined by 35%. The government of Moldova planned to increase both specific and ad valorem rates, but after the “price war” it increased the specific rate but decreased ad valorem rate. Conclusions The tobacco industry uses “price wars” to keep customers and to press governments to adopt profitable excise rates. Tobacco companies can set price wars as they have right to determine maximum retail selling prices. If a country uses “maximum retail prices” to calculate ad valorem excise, regulations should prohibit downward changes of such prices.