<!-- Start of picture text --> Figure 1 – Mean Cigarette Price, by Year Figure 2 – Mean Cigarette Price, by Year and Pack<br>and Pack Size (2010 prices) Size, Real vs. Nominal Prices<br>20,000 25,000<br>20,000<br>15,000<br>15,000<br>10,000<br>10,000<br>5,000 5,000<br>0<br>0<br>2011 2012 2013 2014 2015 2016 2017<br>2011 2012 2013 2014 2015 2016 2017 Year<br>Year Real Prices 12-pack Real Prices 20-pack<br>12-pack 16-pack 20-pack Nominal Prices 12-pack Nominal Prices 20-pack<br>Price (rupiah) Price (rupiah)<br><!-- End of picture text --> _Source:_ 2011–17 data, Euromonitor International (database), Euromonitor International, London, http://www.euromonitor.com/. _Note:_ Real prices are by pack size in 2010 prices. Euromonitor data do not allow a distinction between clove and white cigarettes.

# **Tobacco price elasticity by decile**

Although several models have been tested to estimate decile-level elasticities, the fixed effects with controls model is preferred. (See annex B for more on the methodology and the various iterations of the estimation of tobacco price elasticities by decile.) The estimated average white cigarette price elasticity in Indonesia is −0.63, which is within the estimated elasticities found in the literature on developing countries (a range of −0.4 to −0.8), as well as previous estimates on Indonesia. As expected, lower-income deciles exhibit higher white cigarette price elasticities relative to richer deciles. For instance, the poorest decile has a medium-bound elasticity of −0.77, whereas the richest has an elasticity of −0.55 (table 2). The standard error of these estimates is approximately 0.10, producing a 95 percent confidence interval of −0.20, +0.20.<sup>7</sup> The effect of a tax increase under different scenarios is shown by simulating a lower- and upper-bound elasticity for each decile. The former tends to involve income groups that would not change consumption patterns, such as rural residents or older individuals, while the latter tends to show a longer-term scenario, reflecting the effect the tobacco tax would have on younger individuals. After a few decades, only these would still be alive; the total average effect of the price increase would therefore be approximated more accurately by the upper-bound price elasticity.

**Table 2 – White Cigarettes: Price Elasticities, by Decile**

|_Price elasticity_|_1_|_2_|_3_|_4_|_Dec_<br>_5_|_iles_<br>_6_|_7_|_8_|_9_|_10_|
|---|---|---|---|---|---|---|---|---|---|---|
|Lower bound|−0.567|−0.498|−0.468|−0.444|−0.422|−0.403|−0.393|−0.382|−0.366|−0.345|
|Medium bound|−0.767|−0.698|−0.668|−0.644|−0.622|−0.603|−0.593|−0.582|−0.566|−0.545|
|Upper bound|−0.967|−0.898|−0.868|−0.844|−0.822|−0.803|−0.793|−0.782|−0.766|−0.745|

_Source:_ Estimates based on Indonesia National Socioeconomic Survey 2015–16. _Note_ : Deciles were created using per capita household expenditure. Lower- and upper-bound elasticities show average differences of −0.2 and +0.2, respectively, with the medium-bound elasticity. Demographic controls include: the age, education, and gender of the household head, the share of individuals by age-group in each household, and urban status. The model also controls for year fixed effects. Only 2015– 16 survey years were used to estimate price elasticities because previous surveys asked about the number of cigarette packs consumed, whereas the most recent years ask about quantities of individual cigarettes.

In contrast, average price elasticities are lower for clove cigarettes than for white cigarettes (−0.52). The poorest decile shows a medium-bound price elasticity of −0.64 for clove cigarettes, which is lower than the −0.77 for white cigarettes (tables 2–4, figures 3–4).

> 7 To maintain comparability with similar studies, the same average upper and lower bounds have been applied to all deciles. Applying individual bounds by decile produces minimal changes in the results.

7