Tobacco Documents Online

NBER Models of Price Sensitivity by Age/Sex.

Abstract

This confidential 1982 RJR memo was featured as an exhibit last week in the United States' Department of Justice case against the tobacco industry. It was written by Diane S. Burrows of RJR's Marketing Development Department and was used to demonstrate the marketing of cigarettes to youth. The memo discusses the effects that price increases have on cigarette sales and points out that price affects the incidence of smoking (the rate at which people start to smoke). It contains a chart describing the price elasticity of various groups of smokers by age. One group listed is "TEENS 12-17." Page two of Burrow's memo states, "...[T]he loss of younger adult makes and teenagers is more important to the long term, drying up the supply of new smokers to replace the old. This is not a fixed loss to the industry: its importance increases with time. In ten years, increased rate per day would have been expected to raise this group's consumption by more than 50%." The memo shows not only RJR's interest in marketing cigarettes to youth but also the importance of this group to the industry and RJR's awareness of the phenomenon of tolerance (the need to increase the amount of substance used over time, which is one of the diagnostic criteria for substance dependence).

Fields

Quotes

CONFIDENTIAL

October 6, 1982

SUMMARY OF FINDINGS TO: Mr. L. W. Hall, Jr FROM: Ms. D. S. Burrows RE: NBER MODELS OF PRICE SENSITIVITY BY AGE/SEX

BACKGROUND

In 1981, the Natlonal Bureau of Economic Research (NBER) publlshed two models based on consumers' responses to government smoking surveys. Because the NBER models were cross-sectlonal (testlng differences between people rather than over time) they were able to relate price separately to incidence and rate per day, by age and sex.

The NBER elasticities may not reflect the exact effects of price increases, since their models didn't deal with changes over time. However, the effects they found for other variables (race, income, working women, etc.) are highly consistent with our understanding of market dynamics. Thus, it is likely that the NBER models have correctly identified relative price sensitivity among age/sex groups. A detailed critique of the NBER models 1 Attachment B.

SUMMARY OF FINDINGS

According to the NBER models:

• Teenagers and younger adult males are highly price sensitive.

• Males over 35 have above average price sensitivity. • Women and 26-34 year old men are relatively immune to price. • Price affects incidence; rate per day is virtually unchanged.

TEENS 12-17 EFFECT ON: Incidence -1.19 Consumption -1.44

[From Page 2]:

CONCLUSIONS:

In terms of immediate impact, the effect of price on males 35+ is most important. Half (50%) of the total drop in industry volume is attributable to males 35+, compared to 24% from younger adult males, and 7% from teenagers. (Calculated in Attachment A)

But, the loss of younger adult males and teenagers is more important to the long term, drying up the supply of new smokers to replace the old.* This is not a fixed loss to the industry: its importance increases with time. In ten years, increased rate per day would have been expected to raise this group's consumption by more than 50%.

Company

R.J. Reynolds

Author

Burrows, Diane Stewart (RJR Market Research Analyst)

Recipient

Hall, Lawrence W., Jr. (RJR Marketing)

Worked for RJR Tobacco Co. as a Sales Representative, MR Analyst from 1968- , Director of Marketing Development in 1980, Vice President of Brands Marketing in 1981, Vice President of Marketing Development in 1982, and for RJR International Inc. from 1977-1980. (Source: RJR Who's Who NMLRP)

Region

United States

Litigation

Minnesota Selected

USDOJ

Named Person

Lewit, E.M.

Coate, D.

Grossman, M.

Type

REPORT

LETTER

Subject

Target/Youth (pre-18) (Target Groups)

target market

addiction

marketing

price elasticity