Special communication of RPI-X regulation would help reduce industry resistance to effective public health policy and would be a more practical means of doing so than previous proposals. PRACTICALITIES AND POTENTIAL POLICY CHALLENGES As with any signiﬁcant change in policy, a number of issues would have to be considered when developing the regulatory system. The main and a potentially signiﬁcant barrier would be reluctance to establish a regulatory agency. The issue of cost is, however, easily overcome because, as with other similar agencies, OFSMOKE could be funded through a levy or licence fee paid by all the tobacco companies operating in the market, and need not therefore cost the consumer or taxpayer directly. Consequently, it should be reasonably easy to sell the policy to consumers who are ultimately the voters behind the politicians who would have to implement such a scheme. Public mistrust of the tobacco industry is widely held even among smokers42 and thus a measure to control the oligopoly power of tobacco ﬁrms, given all the aforementioned beneﬁts, should enjoy wide public support. There are likely to be some, most notably the tobacco industry, who suggest that the imposition of this type of direct economic regulation is an extreme reaction. It is hard, however, to argue that nothing needs to be done given the extent of the market power and the number of deaths the sector causes. Moreover, potential alternatives, as outlined above, appear to be less practical or unlikely to address the market failure which will only be ampliﬁed by further tobacco control measures. Furthermore, the imposition of RPI-X regulation is in line with the UK Better Regulation Executive’s ﬁve principles of sound regulation (box 2), thus eliminating a likely line of industry argument.43 A further consideration is whether the tobacco industry or retailer would undermine price controls by switching to a low price strategy. While theoretically possible, both are unlikely. As the proposal would not alter proﬁt margins for the retailer, there is no reason for them to change their current pricing behaviour. For the manufacturer, price controls would probably be set low enough to only allow a return that just covers the cost of industry capital. Thus cutting prices would severely restrict proﬁt per unit. Other tobacco control measures, combined with the inelasticity of demand, would mean that manufacturers and retailers are most unlikely to be able to increase sales sufﬁciently to offset the reduction in revenue per pack that would result, suggesting this would not be a sensible strategy. Furthermore, even if they were to attempt to cut prices, the government could Box 2 The principles of sound regulation and how they are met Five principles for sound regulation are advocated by the UK Better Regulation Executive. The proposed system would meet these because: < It is proportionate to the problem at hand < The regulator would be accountable for its actions < It is consistent with wider government policy towards the tobacco industry < It is transparent as RPI-X is a well-known system with industry consultation and the right to appeal < It is clearly targeted at the cause of the problem Source: http://www.berr.gov.uk/whatwedo/bre/index.html 428 respond by further increasing taxes to ensure the price the consumer faces does not fall. Finally, some might suggest that the increased government revenue might reduce government incentives to implement effective tobacco control measures. While theoretically an issue, it is possible, given the price inelasticity of tobacco, that just as industry proﬁts are increasing despite falling sales, government revenue might follow the same pattern. Even if this was not the case (and this would require further research), any perverse incentives would be mitigated by two aspects of price cap regulation. First, the industry would now have far less incentive to lobby heavily against tobacco control measures as outlined above. Second, the regulatory agency would help distance and shield government from the tobacco industry, as the regulator would now be responsible for determining the impact of tax and tobacco control policies on the industry. Importantly, most governments have extensive experience in undertaking these sorts of activities and the fact that price cap regulation is used in other sectors provides sufﬁcient evidence of its feasibility and legality under both World Trade Organization and European Union rules. Although a detailed review of these issues is outside the remit of this initial exploratory paper, we note that the cap would apply equally to domestic and imported products (and thus be compliant with Article III of the Global Agreement on Tariffs and Trade (GATT)), and as the system would allow reasonable proﬁts (being intended to capture excess proﬁts, not cut salesdthe latter being addressed separately through excise policy), it could not be considered a ‘quantitative restriction’ (Article XI of GATT). THE POTENTIAL FOR BROAD APPLICATION We believe the system proposed could be applied to most markets and, given the consolidation in the tobacco industry in recent years and the highly concentrated market shares seen globally (table 1),3 is increasingly likely to be needed. There are also no reasons why such a scheme is not suitable for markets dominated by state-owned companies. Regulation of a domi- nant state run ﬁrm might seem difﬁcult if, for example, the government in question relies upon it for revenue. However, as established above, regulation of industry prices gives greater scope for direct taxation of tobacco products, so any reduction in the dividends to the government could be offset through the greater scope that they gain in tax policy. Furthermore, there are precedents for dominant government-owned companies being made subject to independent RPI-X regulation, with the Royal Mail in the UK being an example. The key is that the regulation of prices is conducted by an independent regulator acting in the wider public interest, rather than the government making decisions in light of its political position. Moreover, as explored above, there is ﬂexibility in how the system could be applied and it could therefore be carefully adapted to the national context. MOVING FORWARD Clearly such a proposal moves both tobacco pricing and regu- lation beyond its traditional boundaries and further work would be needed to examine in detail how such a scheme might be established. There is, however, a substantial literature and much documented success of adopting RPI-X regulation21 22 and we therefore believe this is a realistic and attractive policy option. This paper demonstrates the strong case for regulation, that the system can be simply applied at no cost to the taxpayer and would bring numerous potential health and ﬁscal beneﬁts. We recognise that any new proposal is likely to meet with initial Tobacco Control 2010;19:423e430. doi:10.1136/tc.2009.034470