First it was the grocery giants, then the petrol retailers, then the banks and the mining companies. Now it’s the turn of Big Tobacco to unleash a campaign of mass confusion on the Australian public in an attempt to undermine government reform of an industry.
Leading this latest blitzkrieg of bluster, the boss of British American Tobacco Australia, David Crow, held a press conference to spell out the various ills that will beset this world if the government is successful in having all cigarettes sold in plain packaging. According to Crow’s vision, Australia will be swamped by a tsunami of illegal imports of cheap ”chop chop” (stop the boats!). Tobacco companies will be forced to slash prices to compete, meaning cheaper cigarettes and more children puffing on fags. Besides, he went on, if you do it, we’ll sue you, and where’s the evidence it will work anyway?
In a bid to enlist smokers in the fight, Philip Morris Australia, owner of the Marlboro and Benson & Hedges brands, has already set up a website, ideservetobeheard.com.au, where smokers can vent their frustrations. ”The plain packaging idea? Stupid,” writes ”Jessica” on the site. ”What exactly is it going to do? Nothing.”
Well, Jessica, if you listened closely to the tobacco companies this week, it appears the one thing plain packaging will do is make it cheaper for you to smoke. Winner! But the tobacco companies have deliberately crafted one story for smokers and another for non-smokers.
The story for smokers goes like this: the price of cigarettes keeps going up and up. It’s the meddling government’s fault and plain packaging is just another attack on you. For non-smokers and public health advocates it’s like this: if you introduce plain packaging, we’ll be forced to slash the price of cigarettes and Asian triads will sell chop chop to your children.
Why do tobacco and junk food companies go to such great lengths crafting advertising campaigns in defence of their right to advertise? Because advertising works. In a perfectly competitive economic system, advertising serves only to inform consumers of a product’s relative merits, and prices reflect demand and supply. But increasingly, advertising has been employed not just as an information mechanism for consumers looking to satisfy their innate consumption preferences, but as a tool to manipulate those desires.
It is a particularly powerful tool when used by companies in industries where competition is lacking. Market power enables such businesses to dictate prices that are above cost and extract super-sized profits.
But advertising takes it a step further, and enables such companies not only to dictate the price of their goods, but the demand for them. Companies plough monopoly profits into making more demand for their products, which in turn boosts their profits again. In such a world, any gains society might hope to get from increased productivity (doing things more efficiently) – such as a lesser need to work and increased time for leisure – are instead overwhelmed by an ever-increasing desire for more goods and services. Some have called this the ”work-and-spend cycle”.
So what is the truth behind the tobacco companies’ campaign? What will happen to cigarette prices if plain packaging is introduced? Will tobacco companies really slash prices, or are they just trying on an argument to scare public health advocates?
In a free market, consisting of many competitors, prices would reflect the balance of supply and demand. Many smokers argue plain packaging will not affect their demand for cigarettes, meaning little impact on price. However, if less attractive packaging means fewer younger people take up the habit, then falling demand could mean prices fall.
But what about the supply side of the equation? Tobacco companies are furiously warning of a tidal wave of illegal tobacco just waiting to hit our shores, boosting supply and leading to lower prices. Presumably Australian Customs would have something to say about that, as would the Australian Federal Police and departments of fair trading.
The only evidence the tobacco industry has on this front is a report by Deloitte that contains an interesting disclosure at the end that says it has relied on the accuracy of information provided to it by, you guessed it, the tobacco companies. ”We have not audited or otherwise verified the accuracy or completeness of the information, and, to that extent, the information contained in this report may not be accurate or reliable,” Deloitte says.
Of course, the dictates of supply and demand mean little if the market for cigarettes is not perfectly competitive and big tobacco companies have monopoly power to set their prices artificially low for a while, which is exactly what they are threatening to do.
So while the companies’ warning of lower prices is clearly self-serving, it is also likely they can make good on the threat. This is concerning because the history of smoking rates suggests consumers are price-sensitive when it comes to cigarettes – they reduce their consumption as prices go up, so it is likely they will increase consumption in any price war. Individuals on tight budgets, such as children, are likely to be most price-reactive.
But, as the economist and head of The Australia Institute, Richard Denniss, has argued, the government could solve this in one step by putting a floor under cigarette prices and matching any price fall below this point with excise increases. Given the negative externalities imposed on society by smoking – the cost to all taxpayers of paying for healthcare for those with chronic illness – there remains a strong argument that cigarettes should still cost a lot more than they do.
Stopping people from smoking because they no longer find cigarette packages attractive is one thing. Stopping people from smoking because they don’t have the money in their pockets to afford it is infinitely more effective.