Short answer
When external cost increases occur, analyze how price adjustments will affect different product tiers and consumer segments to manage market impact and brand perception.
- Field
- Innovation & Markets
- Source
- Fulbright Review of Economics and Policy (2023)
- Method
- Difference-in-Difference (DID) analysis using longitudinal retailer data.
- Evidence
- Strong effect
Following tax increases, retailers in Vietnam passed on more than the full tax amount to consumers, with lower-priced cigarette brands experiencing a greater relative price hike. This innovation & markets research insight is drawn from a 2023 study published in Fulbright Review of Economics and Policy. Using Difference-in-difference (did) analysis using longitudinal retailer data., researchers explored how this design variable affects real-world outcomes. The key design takeaway: When external cost increases occur, analyze how price adjustments will affect different product tiers and consumer segments to manage market impact and brand perception.
Cigarette price increases are over-shifted to consumers, disproportionately affecting low-priced brands.
Following tax increases, retailers in Vietnam passed on more than the full tax amount to consumers, with lower-priced cigarette brands experiencing a greater relative price hike.
Fulbright Review of Economics and Policy · 2023
Key Findings
- 01Evidence of over-shifting of cigarette taxes to consumers.
- 02Low-priced cigarette brands experienced a greater price absorption of the tax increase compared to premium brands.
- 03Real prices increased gradually over one year post-tax change, indicating a cushioning effect to mitigate consumer price shock.
Application
Design takeaway
When external cost increases occur, analyze how price adjustments will affect different product tiers and consumer segments to manage market impact and brand perception.
How to apply
When forecasting the impact of a price increase (e.g., due to new material costs, tariffs, or taxes), segment your product lines and estimate the differential price pass-through for each segment based on perceived consumer sensitivity and competitive landscape.
Project actions
- 01When analyzing price changes, consider the impact on different product tiers (e.g., budget vs. premium).
- 02Investigate how external factors like taxes or supply chain disruptions are passed on to consumers in your chosen market.
Method & Evidence
Variables
Strengths & Limitations
Strengths
- +Utilizes unique, longitudinal micro-level retailer data.
- +Employs a robust Difference-in-Difference methodology.
Limitations
The specific tax structure and currency dynamics of Vietnam might not be directly transferable to other markets. The study's focus on cigarettes may limit generalizability to other product categories.
Reliability & validity
The use of longitudinal data and a DID approach enhances the study's internal validity by controlling for unobserved time-invariant characteristics. The reliance on retailer data provides a direct measure of price changes, contributing to external validity within the Vietnamese context.
Think critically
To what extent do the findings on over-shifting and differential impact on low-priced brands hold true for other regulated industries or markets with different tax structures and consumer bases?
Design Principles
"Price elasticity varies by product segment and consumer group; strategic pricing must account for these differences when responding to cost fluctuations."
This research highlights how pricing strategies in response to regulatory changes can create differential impacts across product segments. Understanding these dynamics is crucial for businesses aiming to navigate market shifts and for policymakers seeking to achieve specific economic or social outcomes through taxation.
What This Means for Your Design
When taxes on products like cigarettes go up, shops often charge more than the tax increase, and people who buy the cheaper brands end up paying a bigger percentage increase.
How to use in your project
- 1.Use this study to justify an investigation into how price changes affect different user segments or product variations in your own design project.
- 2.Reference the findings to support claims about consumer price sensitivity and market segmentation in your analysis.
Add to My Project
Quick Cite
Paragraph starter
Research indicates that in markets like Vietnam, following excise tax increases on tobacco, retailers tend to over-shift the tax burden to consumers, with a disproportionate impact on lower-priced brands. This suggests that pricing strategies in response to regulatory changes are not uniform across product segments and can lead to varied consumer experiences.
Source
Fulbright Review of Economics and Policy
Cigarette tax pass-through in Vietnam: evidence from retailers’ data
journal · 2023
View sourceQuestions About This Research
- What does the research say about cigarette price increases are over-shifted to consumers, disproportionately affecting low-priced brands?
- When external cost increases occur, analyze how price adjustments will affect different product tiers and consumer segments to manage market impact and brand perception. Evidence: Fulbright Review of Economics and Policy (2023).
- Why does "Cigarette price increases are over-shifted to consumers, disproportionately affecting low-priced brands." matter for design?
- This research highlights how pricing strategies in response to regulatory changes can create differential impacts across product segments. Understanding these dynamics is crucial for businesses aiming to navigate market shifts and for policymakers seeking to achieve specific economic or social outcomes through taxation.
- How can designers apply this research?
- When external cost increases occur, analyze how price adjustments will affect different product tiers and consumer segments to manage market impact and brand perception.
- What were the main findings?
- Evidence of over-shifting of cigarette taxes to consumers.. Low-priced cigarette brands experienced a greater price absorption of the tax increase compared to premium brands.. Real prices increased gradually over one year post-tax change, indicating a cushioning effect to mitigate consumer price shock.
- What research method was used?
- Difference-in-Difference (DID) analysis using longitudinal retailer data..
- How strong is the evidence?
- Evidence strength is rated Strong effect, based on a 2023 journal from Fulbright Review of Economics and Policy.
- What should I do differently in my next project?
- When forecasting the impact of a price increase (e.g., due to new material costs, tariffs, or taxes), segment your product lines and estimate the differential price pass-through for each segment based on perceived consumer sensitivity and competitive landscape.
- What are the limitations?
- The study focused on specific factory-made cigarette brands and may not represent all tobacco products or informal market dynamics comprehensively. The analysis period was limited to one year post-tax change.