• economics;
  • plain packaging;
  • cigarette industry;
  • advertising;
  • market structure
  • I18;
  • L11;
  • L66;
  • M37


  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Background on the Australian Cigarette Market
  5. 3. Effects of Plain Packaging on Competition and Market Structure
  6. 4. Conclusions and Final remarks
  7. References
  8. Appendices

The Australian Parliament has passed legislation compelling tobacco products to be sold in “plain packaging.” This article reviews this legislation and its likely effects on prices, market structure in the tobacco industry and on smoking behaviour. Industry changes following two previous sets of restrictions on advertising are examined for relevant empirical evidence. Without offsetting tax increases, the legislation will plausibly reduce prices but significant entry into the industry and greater consumption of counterfeit/illegal cigarettes are unlikely. Provided that tax increases offset any induced fall in prices, plain packaging will reduce cigarette consumption.

1. Introduction

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Background on the Australian Cigarette Market
  5. 3. Effects of Plain Packaging on Competition and Market Structure
  6. 4. Conclusions and Final remarks
  7. References
  8. Appendices

From the mid-1970s, Australian governments have placed successively more stringent restrictions on cigarette advertising. The most recent of these requires replacing standard packaging, with its trademarks and graphic anti-smoking messages, with a drab dark brown plain package with the name of the product, anti-smoking messages and little else. The term given for this is “plain packaging” (hereafter PP), however, given that packaging is dominated by graphic health messages, a better term is “dissuasive packaging” (Health Canada, 1995). The case for PP is that it discourages smoking, particularly the initiation of smoking by youth, by making smoking less attractive (Germain et al., 2010; Quit Victoria, 2011). Smoking is recognised by smokers and non-smokers alike as a highly risky activity. Hammond and Parkinson (2009) provide experimental evidence, as well as documentation from cigarette producers, confirming that package design does drive inferences about the magnitude of such risks and hence market demands. For example, light-coloured packets and packs with a picture of a filter were perceived as having lower health risks.

The PP policy has, however, been criticised as potentially reducing cigarette prices, thereby encouraging smoking (Padilla, 2010; BATA, 2011). By making brands less attractive and more similar, the different brands will appear less differentiated and hence closer substitutes. This reduces the market power of firms resulting in lower prices. In addition, it is claimed that, by potentially reducing brand loyalty, there may be increased sales of counterfeit and illegal, unbranded cigarettes and tobaccos.2 Even if PP is dissuasive, will the net effect of introducing it on demand be positive or negative, accounting for these latter effects?

The question as to whether PP will reduce smoking or will have its effects offset by price cutting and increased illegal cigarette usage cannot be found by analysing the effects of this policy in other countries, as PP has not been tried elsewhere. However, insight can be obtained into likely effects by considering earlier restrictions on, in turn, electronic and subsequently print media advertising of cigarettes. These policies should have had analogous effects in reducing inter-brand substitutability as will PP. There are two key questions. Were these earlier restrictions followed by price cutting and was there a surge in competitive entry following such policies? This should suggest what will happen with PP.

This article argues that there was evidence of price cutting, through quantity discounting, following these earlier restrictions. However, there is no evidence that competitive entry became more attractive. Indeed, there has not been substantial entry since the early 1970s. Not long after print advertising was prohibited, incumbent cigarette companies largely ceased introducing new brands. This suggests the market was less profitable for incumbents considering introducing new brands and also less profitable for new entrants.

It can be concluded that, at worst, PP will have relatively small effects in reducing cigarette demands. PP is likely to make cigarettes somewhat less attractive, particularly to young smokers and, if price declines do occur, an increased cigarette excise can offset this. Similarly, problems of counterfeit cigarettes and illegal unbranded cigarettes seem overstated. Policies can be developed to address such issues should they arise. For example, if there was evidence of increased sales of counterfeit cigarettes, this could be dealt with by making the dissuasive packaging intricate enough to make effective counterfeiting very expensive.

This article proceeds as follows. In Section 2, background on the cigarette market is provided with a summary of the PP legislation. Section 3 surveys economic models of competition by brand and applies these to the PP issue by analysing some Australian cigarette market history. Section 4 summarises conclusions and makes final remarks.

2. Background on the Australian Cigarette Market

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Background on the Australian Cigarette Market
  5. 3. Effects of Plain Packaging on Competition and Market Structure
  6. 4. Conclusions and Final remarks
  7. References
  8. Appendices

This section analyses regulatory changes in the Australian cigarette market between 1970 and 2010, as well as the recent PP legislation.

2.1 Contemporary Cigarette Market and its Evolution

The main developments in the Australian cigarette market are described in Table 1 and discussed further in Scollo and Winstanley (2008). After the Second World War, the incidence of cigarette smoking – the proportion of the adult population who smoked – in Australia declined, even as the absolute size of the cigarette market increased until at least 1976 because of population growth and increased consumption per capita by those who continued smoking. Thereafter, not only did absolute numbers of smokers decline (from 3.3 million persons in 1976 to 3.1 million persons in 2007 during a period where the total adult population increased seventy-four per cent), but the total market itself contracted. The smaller base of smokers, each smoked far fewer cigarettes per day particularly during the latter part of this period. Scollo and Winstanley (2008, Table 2.7) estimate that annual cigarette consumption per smoker fell from 2016 in 1998 to 1398 in 2006. This suggests that, health warnings fostered by the programme of public anti-smoking messages, Quit campaigns and substantially increased excises on cigarettes decreased both the incidence and the per capita smoking intensities. Table 1 shows that the cigarette market contracted in the early 1990s, with a dramatic decline from 1990 to 2001, during which it shrank in absolute terms by one-third.

Table 1. Australian Cigarette Market
  1. Notes: Real excise rates using the CPI (1989/1990 = 100). BATA, British-American Tobacco Australia; ITA, Imperial Tobacco Australia; PMI, Philip Morris.

  2. Sources: 2001 to 2010 Euromonitor Database. 1970–1995 documents from the Legacy Database as used in Pham and Prentice (2010). License rate is that applicable to the largest group of states.

  3. .

Market size
Cigarettes purchased (million)26,79431,35334,46533,22534,56028,97622,77422,53220,151
Per head21422257234521042025160311731105904
Excise (per kg.)52.9156.6952.6647.4747.2468.00   
Excise (per stick)
License rate00102535100NANANA
Company market share
BATA      42.044.646.4
ITA      17.717.716.2

The cigarette market is now concentrated among those with low educational attainment, low occupational prestige and among indigenous Australians and new Australians from particular ethnic backgrounds (Scollo and Winstanley, 2008, chapters 8–9). Slower rates of decline in the size of the market since 2001 suggest that this diminished pool of smokers has become resistant to pre-existing anti-smoking policy messages, so new strategies for reducing smoking have been sought. Partly, this has taken the form of focused attempts to encourage quits – such as campaigns directed at indigenous groups – but the focus has also been on eliminating the last area that cigarettes can be promoted, namely via their packaging.

Between 1975 and 2010, nearly all cigarettes sold in Australia have been manufactured or, to a much lesser extent, imported by three large firms. Other imported cigarettes had a negligible market share. Between 1975 and 1999, the firms were W.D & H.O Wills, Rothmans and Philip Morris. All are subsidiaries of international cigarette companies. In 1999, following the merger of the international parents of Wills and Rothmans, the brands manufactured by these companies were distributed between two new companies. The first, British-American Tobacco Australia (BATA) was the successor company to Wills and Rothmans. The second, Imperial Tobacco Australia (ITA) is the local subsidiary of another international cigarette company which distributes a set of brands, imported or manufactured at a BATA factory, divested, by agreement with the ACCC, from Wills and Rothmans. The market shares of these firms are reported in Table 1.

2.2 Regulatory Changes: 1970–2010

The main past regulatory changes have been restrictions on advertising and increases in tobacco excises. Significant restrictions on advertising have occurred through Commonwealth government legislation which:

  •  Between 1973 and 1976, phased out advertising of cigarettes on radio and television.
  •  From late 1990, banned advertising of cigarettes in the print media. Furthermore, between 1992 and 1995, most tobacco sponsorship was banned as were billboard and illuminated sign advertising.

From the late 1990s, state governments progressively restricted advertising at the point of cigarette sale. From 2010–2011, cigarettes could no longer be displayed at all at the point of sale in NSW and Victoria other than in specialist tobacconists.

Very little advertising remains. Cigarettes are hidden from customers at the point of sale and compulsory health warnings are posted. There is only negligible promotion of cigarette sales by discounters on the Web and via restricted event promotions. The only major way firms can now draw attention to the specific products they sell is by branding their products and this provides the logic behind the PP legislation. It is also worth noting that from 2005, cigarette companies were no longer permitted, as a result of undertakings given to the ACCC, to use “mild,”“light” and similar terms in brand names or on packaging, which further restricted the nature of packaging that could be used on cigarettes.

Other regulatory changes have included substantially increased tobacco taxes. As summarised in Table 1, taxes on cigarettes were increased substantially from 1970. In 1970, the real excise was about $53 per kilo and by 1995 it was $68 in 1989/90 prices. Over the same period, ad valorem taxes imposed on recommended retail prices by the states increased from zero to 100 per cent. The sharpest increase in taxes occurred in the early 1990s when both Commonwealth excise and state taxes increased substantially. Once state taxes were ruled unconstitutional, they were incorporated into the Commonwealth excise. Between 1999 and 2001 and again in 2010, there were further substantial tax increases. From 1999 to 2001, the excise changed from a combined per kilo and ad valorem tax to a specific per-stick tax. This substantially increased the tax payable on cigarettes in large packets that had become popular between 1980 and 2000.3 In addition, when the ten per cent goods and services tax (GST) was introduced in 2001, this was added to existing taxes. On 29 April 2010, the government increased the nominal excise on cigarettes from $0.2622 to $0.32775 per stick.

Finally, note that both State and Commonwealth Governments have implemented a range of other policies aimed at reducing smoking. From the 1970s, there were advertising and education campaigns aimed at discouraging smoking, particularly by youth, and to encourage existing smokers to quit. From 2006, cigarette packages were required to prominently display large graphic health warnings. In addition, at the state level, increasing restrictions have been placed on where smoking could occur. Smoking is now prohibited in workplaces, most entertainment venues, many public places and even in cars when non-smokers are also commuting.

2.3 Plain Packaging

The most recent substantial restriction on advertising is a world first. The Tobacco Plain Packaging Bill 2011 was passed on 21 November, 2011 and will take effect on 1 December, 2012.4 This Bill5:

  •  Makes it an offence to sell tobacco products not in PP. It is not an offence to buy or possess tobacco products not in PP.
  •  Requires packaging to be a featureless, standardised drab dark-brown colour with trade names in a standard font that is specified in the accompanying regulation as Lucinda Sans. Health warnings remain on the pack.
  •  Requires cigarette sticks to also be standardised, without trademarks or any other marks unless permitted by the regulations.
  •  Imposes penalties for non-compliance that are the same as those for failing to feature health warnings. Maximum fines are $220,000 for individuals and $1.1 million for corporations.
  •  Provides exemptions for tobacco products produced for export.

Complementary policies include the large increase in the tobacco excise introduced in April 2010, ongoing general and targeted negative advertising campaigns and the more extensive inclusion of anti-smoking treatments such as nicotine replacement therapies as part of the Pharmaceutical Benefits Scheme (Department of Health and Ageing, 2011b).

The Explanatory Memorandum for the Tobacco Plain Packaging Bill (Department of Health and Ageing, 2011b)) sets out the policy context for PP. It argues that packaging is designed to make brands more appealing, particularly for the young, whereas PP is less attractive. In addition, existing packaging is seen as reducing the effectiveness of the anti-smoking messages that are required to be on the packaging by distracting from the messages or even, effectively, suggesting that certain types of cigarettes may be safer. To support these claims, studies from the public health literature are cited (see particularly the effects of PP in discouraging youth smoking by Germain et al., 2010). More references are provided in Quit Victoria (2011).

There have been two main lines of criticism of PP legislation.6 The first main criticism is that there is no evidence that PP will achieve the objectives of reducing smoking. The public health literature used to support the claims that PP will reduce smoking is criticised on various grounds (see e.g. the critique by Padilla and Watson, 2010, in their report for Philip Morris International (PMI)).

The second main line of criticism is that the PP legislation may be counterproductive because it may result in lower prices, increasing cigarette consumption. For example, BATA’s submission (BATA, 2011, pp. 18–21) to the House of Representatives Standing Committee on Health and Ageing Advisory Report on the Bill, claims that PP will:

  •  lead to lower prices that may increase consumption because of increased competition between legal manufacturers and from counterfeit products and
  •  result in increased trade of counterfeit cigarettes associated with organised crime.

The BATA submission does not suggest whether it is primarily legal or illegal incumbents or entrants who will cater for the increased demand. Padilla (2010) specifically models the effects of low-cost legal entrants into the Australian market, but does not model the illegal cigarette market.

3. Effects of Plain Packaging on Competition and Market Structure

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Background on the Australian Cigarette Market
  5. 3. Effects of Plain Packaging on Competition and Market Structure
  6. 4. Conclusions and Final remarks
  7. References
  8. Appendices

This section analyses criticisms of the PP legislation. This is achieved by surveying relevant theory and by reviewing the changes in prices and market structure that followed restrictions on primarily electronic advertising and then print advertising in Australia. Implications for the supply of illegal cigarettes are also examined.

3.1 A Theoretical Analysis and a Framework for Empirical Analysis

In this section, the claim that, by reducing product differentiation, PP will lead to lower prices, competitive entry and greater illicit trade, is analysed.

Because PP has not been tried anywhere, there is no direct evidence on its effectiveness. Moreover, deriving evidence indirectly through experiments and surveys (see Quit Victoria, 2011, and the critique in Padilla and Watson, 2010) is difficult. However, this lack of evidence does not, in itself, imply that PP will be ineffective. Cigarette producers invest intensely in packaging, which suggests, a priori, that it is important for attracting smokers. The size of these effects in driving consumer demand is an empirical question, but they are unlikely to be zero.

It is interesting to note that the criticism of the PP legislation – that removing advertising encourages price competition – goes some way to nullifying the claim that packaging does not boost demand. Packaging must in some way increase willingness to pay and demand if removing packaging results in greater price competition. For the remainder of the article, the plausible assumption is adopted that PP will reduce the demand for cigarettes.

The criticism that removing advertising encourages short-run price competition is based on the standard view of advertising as promoting product differentiation, either by informing consumers about the quality of products or as a product characteristic itself. Either way, product differentiation reduces own and cross-price demand elasticities that permit firms to charge higher prices. Conversely, removing advertising makes cigarettes seem less differentiated, increasing the price sensitivity of demand for each brand.7 Competition then drives prices down, resulting in lower firm profits.8 Lower prices should result in greater consumption, but this effect will be offset by the decline in demand induced by the reduced attractiveness of smoking without the distinctive packaging. It then becomes an empirical question as to whether the net effect of PP will be to substantially increase demand. Padilla (2010) argues that the increase could be substantial, but in Appendix I, Padilla’s arguments are analysed and large consumption increases are shown to be unlikely.

An additional implication of reduced product differentiation is that market shares of different brands should depend on relative costs. If removing packaging differences erodes the effects of previous advertising, then both legal and illegal cigarettes will be perceived as more homogeneous, so prices would tend towards marginal cost. Market shares would then depend only on production efficiencies with lower cost producers having greater shares. This process would be delayed by residual brand loyalty so that whether such trends are observed is an empirical question.

Apart from changing market shares of existing brands Padilla (2010) argues that, in the longer run, competitive entry may occur as barriers to entry from advertising-generated differentiation fall. Specifically, before PP, additional entry may not have occurred because the low own and cross-price elasticities of demand generated by advertising prevented entrants from being able to generate sufficient sales to profitably enter. Removing product differentiation based on advertising would then make it easier for entrants to attract sales without having to cut prices so much.

Entry in a market tends to follow a market becoming larger or more profitable, so more firms can be supported. The reverse causation from competition to concentration has most recently been analysed in Sutton (1991). Sutton, as well as Symeondis (2002), provides evidence of how increases in competition lead to greater concentration because of lower profitability. Hence, reducing differentiation by using PP should increase competition and reduce the likelihood of competitive entry.9 Equivalently, one can ask why could it be profitable for low-cost entrants (and illegal cigarette manufacturers) to enter when the market is more competitive, when it would have been even more profitable for entry to occur when the market was less competitive and more profitable?10

The same reasoning can be applied to the range of products offered for sale. Given fixed costs of offering a new product in a market of given size and profitability, there is an optimal product range that can be offered. If the market shrinks or profitability declines, the range of products that can be offered will decline. While the theory does not specify the types of products that will exit if a market becomes less profitable, Sutton’s analysis does predict that increased competition will result in fewer products being offered.

BATA (2011) also suggests that PP will result in an expansion in the size of the illegal cigarette market.11 Illegal sellers can be thought of as sellers who offer a lower quality product produced at much lower cost who respond to profitable opportunities in the same way as legal firms.12 Hence, the market share of illegal cigarettes could rise following PP as less-differentiated legal brands and illegal cigarettes become closer substitutes and consumers switch to lower price cigarettes and consume more.

However, this argument ignores the reason that the market share of illegal cigarettes is limited even though their cigarettes are already much cheaper than legal brands. Illegal firms differ from legal firms in requiring higher rates of return to compensate for bearing risks of prosecution and penalties. If the probability of prosecution increases with increasing market share, it is likely that a still greater rate of return is required for the illegal seller to expand operations. Thus, expected marginal costs will increase more sharply with sales than for legal suppliers. This suggests there are limits to the expansion of the illegal market. Furthermore, greater competition among legal suppliers that lowers price also discourages the expansion of illegal suppliers.

The plausible effects of introducing PP can be summarised. With less differentiation, there are likely to be lower prices from greater competition between incumbents. If lower barriers to entry due to the reduced impact of advertising are more important than greater competition, then competitive entry, lower concentration and a greater share of the market going to illegal cigarettes will result. However, if greater competition is relatively more important, then the exit of products should increase concentration at the brand level and the size of the illegal market may even contract. There will be a tendency to more uniform market shares unless brands have different marginal costs. Although the PP outcome of greater competition, falling prices and, in the long run, competitive entry seems plausible, this requires the effects of falling barriers to entry to be greater than the effects of greater competition. It is difficult to have a market that is both more competitive for incumbents and more attractive to entry. Which of these cases hold is an empirical question that is now analysed.

Although PP has not yet been tried, there have been analogous previous restrictions on advertising that have sought to reduce product differentiation. In 1976 and 1990 in Australia, substantial restrictions on electronic and print advertising were introduced. These moves seem to be a more significant restriction on the ability of firms to differentiate their products than restricting packaging alone. Moreover, the cumulative effect of restricting more and more channels to advertise should also be noted. There may be an even more substantial cumulative effect of PP, simply because it eliminates the last means of product promotion.

Both direct and cumulative effects of advertising restrictions are examined. Thus, there is an analysis of whether (i) these policies were followed by increased competition leading to price cuts and competitive entry; and (ii) whether this changed as the cumulative impact of restrictions increased. Indirect evidence of changes in competition such as entry, exit and changes in concentration are also analysed following the approach of Sutton (1991). Finally, the behaviour of market shares is examined. These exercises are implemented using data on prices, market shares and brands in Pham and Prentice (2010) supplemented with recent data. See Appendix II for more details.

3.2 Did Restricting Advertising Increase Competition and Reduce Prices?

Developments after each of the two sets of restrictions on advertising were imposed are now shown to be consistent with increased competition. Because these restrictions were accompanied by tax increases, we cannot show that net of tax prices fell after 1990. However, in each case, the restrictions were followed by firms introducing greater pack sizes which had relatively lower prices than for products offered before restrictions and before the tax increases were imposed.

Table 2 reports the median real per-stick price by pack size by year. The unit of observation is pack size by brand. For example, Dunhill 20s and Dunhill 25s are separate observations. Table 3 reports estimated market share by pack size.

Table 2. Average Price of Cigarettes by Pack Size 1975–2010
 Real average price per stick (Number of observations in parentheses)
  1. Source: As for Table 1. See Appendix II for more details.

Domestic brands by pack size
10      0.53 (1)0.49 (1)
15  0.10 (1)     
200.11 (65)0.11 (59)0.14 (46)0.14 (38)0.25 (29)0.29 (30)0.28 (25)0.38 (18)
25 0.09 (18)0.11 (28)0.12 (22)0.22 (17)0.26 (17)0.27 (13)0.36 (15)
30  0.10 (10)0.10 (13)0.20 (9)0.24 (9)0.24 (5)0.31 (6)
35   0.09 (4)0.19 (7)0.25 (6)0.25 (6)0.39 (3)
40   0.08 (3)0.19 (4)0.23 (3)0.23 (3)0.31 (4)
500.12 (1)0.11 (1)0.14 (1) 0.17 (3)0.23 (2)0.22 (2)0.30 (2)
Number of observations6678878069675549
Average price0.
Table 3. Market Share by Pack Size
  1. Source: 1975–1995 as for Table 1. See Appendix II for more details. Estimate from 2010 from Euromonitor.

15s  0.5   
25s 55.149.34337.645.0
30s  26.7241621.0
35s   14.14.8 
40s   1119.1 
50s   0.518.1 
35s +     18.0

Consider changes in real cigarette prices following the television and radio advertising bans in 1976 by comparing average prices and market shares for packet sizes of twenty and twenty-five in 1975 and those in 1980. This comparison is complicated by the simultaneous cut of about ten per cent in the real excise and the imposition of a ten per cent license fee. The main market change was that, whereas in 1975 nearly all cigarettes were sold in packs of twenty, in 1980 55 per cent were sold in packs of twenty-five with a real per-stick price two cents lower than the 1975 price. The average real price of cigarettes sold in packs of twenty remained unchanged. This change is consistent with advertising restrictions being followed by increased competition via quantity discounting. This interpretation is supported by the discussion in two internal marketing documents for two major companies available in the Legacy Tobacco Documents Library (W.D and H.O Wills, undated though plausibly the early 1980s) and Philip Morris (undated but plausibly the late 1980s). Both make it clear that larger pack sizes were discounted. Specifically, twenty-five cigarettes were introduced for the same price as twenty, and then thirty for the same price as twenty-five and so on. W.D and H.O Wills interpret these changes as a continuation of competitive responses that date back to the 1960s. Philip Morris, written latter, assigned roles to increased taxation, the anti-smoking lobby and advertising restrictions which reduced the value of branding as well as general competition.13

The same analysis can be carried out for the 1990 advertising bans by comparing prices and market shares in 1990 and 1995. The impact of these restrictions is again obscured by a forty-four per cent increase in the real excise over this period as well as a general increase, in all states except Queensland, in state tax rates from around thirty-five per cent to 100 per cent. Prices across all pack sizes increased. However, new brands with pack sizes of forty and fifty were introduced shortly after the restrictions on advertising and obtained a thirty-seven per cent market share by 1995. This could have been a response to the tax increases as cigarettes in large packs tended to be lighter, have a lower wholesale per-stick price, compared with larger packets offered in the same period, and therefore attracted less tax. However, larger packs were introduced following the advertising restrictions in 1976 and, following the large tax increases of 1999–2001, there was no further expansion in pack size.14

To sum up, the 1976 advertising restrictions were followed by increased price competition, as suggested by the fall in real prices through quantity discounting and the statements in company marketing documents. This suggests that the further quantity discounting between 1990 and 1995 was also a response to the advertising restrictions introduced in 1990; although quantity discounting may have also been, in part a response to greater taxation, it should be noted that tax increases in 1999–2001 were not followed by further quantity discounting, whereas advertising restrictions in 1976 were.

3.3 Did Restricting Advertising Encourage Competitive Entry?

Restrictions on advertising will encourage entry if their main consequence is reduced barriers to entry, but increased competitiveness will tend to deter entry. Evidence from the two sets of restrictions on advertising suggests that, on balance, restricting advertising did not encourage competitive entry.

In fact, the behaviour of the major firms is consistent with a general decline in the profitability of the cigarette market for incumbents and potential entrants.

Entry did occur during the 1950s and 1960s while Australian cigarette consumption was expanding. The predecessor of Wills, British Australian Tobacco, dominated the market up to the 1950s when Rothmans and Philip Morris entered. Two other sizeable firms, Godfrey Phillips and Gallahers, operated at different times during the 1950s and 1960s before exiting and/or merging with other local firms. (Walker, 1984). Walker’s account of the 1950s and 1960s suggests there were considerable changes in market shares then with heavy use of advertising and extensive price competition.

However, although cigarette consumption continued to expand up until 1990, there was no further firm entry after the early 1970s. The last entrant, RJ Reynolds, operated on a small scale, without its own manufacturing plant, by importing and getting other manufacturers to produce for them from the early 1970s to the early 1990s. Thereafter, they effectively exited with Rothmans taking over the distribution of their few active brands.

Furthermore, over the whole sample period, imports have a negligible share of the market. While there has been some shift in the nature of imports from high-price European and American cigarettes to low-price Asian cigarettes, their market share has remained negligible.

This evidence is consistent with expected profit from entry by new firms declining after the mid-1970s. Profitability may have declined due to increased competition following advertising restrictions, although increased taxes and falling market size after 1990 would have also reduced profitability. The evidence is inconsistent with the claim that restricting advertising lowered barriers to entry for low-cost legal competitors. Competition from illegal entrants is discussed below.

3.4 Changes in the Rate of Brand Entry

To gain further information about whether PP will affect market structure and encourage competitive entry, changes in the rate of entry of brands following earlier restrictions on advertising are analysed.

Tables 4 and 5 report numbers of brands and their concentration. In compiling these data, Winfield and Marlboro, for example, are treated as distinct brands whereas different pack sizes of the same brands (such as Marlboro 20s and Marlboro 25s) or different varieties of the same brand (Mild, Extra Mild, Menthol) are not considered distinct. The data suggest a substantial decrease in brand-level entry occurred after the restrictions on print advertising were introduced in 1990.

Table 4. Number of Brands
  1. Notes: Entrants: Number of brands present in a year that were present five years before e.g. twenty domestic brands were present in 1975 that were not present in 1970. Exits: Number of brands that were present five years earlier that are no longer present e.g. eleven domestic brands present in 1975 were not included in 1980.

  2. Source: As for previous tables – see Appendix II for details.

Domestic 119141291111
Imports 2780715
Total 13162212161216
Table 5. Concentration at the Brand level in the Cigarette Market
  1. Source: See Appendix II for details.

Standard deviation2.838.989.265.901.783.264.515.4
Standard deviation3.747.528.136.335.446.716.905.4
Maximum (of top 8)1325.226.521.11620.622.823.6
Minimum (of top 8)
Change in top 4 1111000
Change to 5–8 1442100
Changes in top 8 1342100

From Table 4, the three major firms are observed to have numerous brands over the sample period. The first and third rows of Table 5 report four- and eight-brand concentration ratios. These are typically high, suggesting that the large firms feature a small number of brands with large market shares and many brands with small shares.

The numbers of entering and exiting brands between 1975 and 2010 are reported in the remainder of Table 4. The next three rows on Entrants report numbers of brands sold in that year that were not sold in the previous year by domestic producers, by importers and in total. For example, in 1975 there were twenty domestic brands not sold in 1970. The last three rows report Exits, the number of brands sold in the preceding year not sold in the year of interest. For example, in 1980, there were 11 domestic brands sold in 1975 that were no longer sold in 1980.15 The extent of entry and exit before 1990 is understated as firms not infrequently introduced brands that entered and exited between the reference years. This rarely occurred for domestic brands after 1990.

Consider the restrictions on television and radio advertising. Although there is evidence of lower prices on larger packet-size brands, there is no decline in the number of domestic brands that would result from a dramatic fall in profits. However, note that comparing the experience in 1975–1980 with that in 1970–1975, the number of entrants halves in this latter period even though the market continued to grow after 1975. Also note that, during this period, some new brands were discounted, large-pack brands. This is reflected in the substantial changes in the Top 8 brands following 1980 at the bottom of Table 5. As noted earlier, Wills (undated) saw the need to quantity discount with either existing brands or brands heavily supported with advertising to avoid the discounted cigarettes seeming low quality as well as cheap. This suggests that even though electronic advertising was restricted, print advertising was sufficient to successfully launch new brands.

Extending advertising bans to print were associated with much larger changes in the number of brands. From 1975 to 1990, the number of entrants and exits of domestic brands, every five years, is roughly similar (brand churning) – around ten – even though the market size increased and then remained around the same size.16

After 1990, the number of exits for each period continues at about the same rate up to 2010. However, the number of entrants halves between 1990 and 1995 and then virtually ceases. This results in a substantial decline in the number of domestic brands. There were new product lines, but these tended to be small variations on existing products or changes in pack sizes for existing brands. This suggests that the restrictions on advertising, and possibly other restrictions on distribution, reduced the expected profitability of launching new brands and, as the market shrunk, small market-share brands were withdrawn. Note that after 2001 there are no changes in the Top 8. This again suggests that, following the more extensive restrictions on advertising, competition via new brands became more difficult. Supporting this conclusion is the fact that, unlike in earlier periods, none of the new brands introduced after 1995 achieved market shares in the Top 8.

It is important to note that the end of entry was not solely due to the market ceasing to grow. During the 1980s, while the market size remained roughly constant, entry (and exit) at the brand level occurred at a fairly rapid rate. However, when the market stabilised between 2001 and 2010, brand churn did not return, suggesting the expected profitability of introducing new brands fell after print advertising was banned on top of the existing bans on advertising on radio and television. This provides further evidence that restrictions on advertising did not facilitate low-cost entry despite greater competition. The incumbent firms have not been able to successfully introduce a low-cost brand since the 1990s and there has been no successful large-scale entry by importers.

In general, the experience following both sets of advertising restrictions does not suggest it was easier to introduce new brands, even for incumbent producers. Furthermore, the almost complete ceasing of new brands following the end of print advertising suggests it would be very difficult for an entrant to successfully introduce a new brand on a substantial scale.

3.5 Greater Concentration and Uniformity of Market Shares

Finally, using Table 5, consider whether concentration increased following the two phases of advertising restrictions and whether market shares became more uniform. As argued, the former is consistent with competition increasing, reducing profits, resulting in less brands being able to be sustained in the market. The latter is consistent with legal brands being perceived as being more homogeneous.

A substantial increase in concentration following the restriction on advertising in 1975 can be observed, although there is also a further increase between 1980 and 1985. This tended to be associated with new (or relaunched) brands with larger pack sizes (twenty-five and thirty) taking substantial market shares as discussed. The next jump in concentration occurred in the late 1990s, as tax rates began to increase and again was associated with new brands with larger pack sizes (forty and fifty) entering the Top 8. This is consistent with greater competition following each set of restrictions on advertising.

The effect of restrictions on the diversity of market shares (as measured by the standard deviation) within the Top 8 differed between the two episodes. Following 1975, diversity increased and then gradually fell, whereas after 1990, diversity fell and then gradually increased. Hence, while increased restrictions on advertising were associated with greater concentration at the brand level, consistent with the arguments of Sutton (1991), the data provided here do not provide evidence that restricting advertising has lead to more uniform market shares. This could be due to some combination of brand loyalty and marketing practices. For example, in many cigarette retailers such as supermarkets and convenience stores, only a very limited selection of brands is available.

This suggests that even after imposing advertising bans, large brands were able to maintain their advantages from product differentiation as reflected by maintaining their market shares. If anything, there was more turnover in brands before advertising than afterwards.

3.6 Will Plain Packaging Increase the Market Share of Illegal Cigarettes?

So far only effects of advertising restrictions on entry by legal cigarette supplies have been considered. An objection to PP is that it may result in a greater share of unbranded and counterfeit cigarettes.17 In Deloitte (2011), a report prepared for the three large Australian cigarette firms, it is claimed that the current share of illegal cigarettes in total consumption is already substantial and growing rapidly. It was claimed to be six per cent in 2007 and 15.9 per cent in 2010. Deloitte estimate that ninety-one per cent of consumers of illegal cigarettes purchased unbranded cigarettes (or loose tobacco) and another four per cent purchased counterfeit cigarettes. Only forty per cent of counterfeit cigarettes, making up just four per cent of the illegal cigarette market, were copies of “major known brands.” The remainder of counterfeit cigarettes were “exotic” brands, mainly from China. Illegal cigarettes tend to be cheaper than legal cigarettes.

Deloitte’s estimates of the size of the market share of illegal cigarettes have been challenged as being too high. Other survey evidence suggests that the share was about three per cent and not increasing (House of Representatives Standing Committee on Health and Ageing, 2011).

In addition, we argue that the observed stability of market shares between 2005 and 2010 suggests that there has not been a change in the share of illegal cigarettes. While sales of illegal cigarettes are unrecorded, it is likely that low-price illegal brands would affect some legal brands more than others. A change in the price of a product will have its greatest effects on its closest substitutes. If it is the case that low-price legal cigarettes are the closest substitute for cheap illegal cigarettes, then if there is a large increase in the supply of illegal cigarettes, then the market share of low-price legal cigarettes should decline and that of higher price cigarettes should increase. As low-price legal brands were introduced, there were substantial changes in the market shares of incumbent brands, as reflected in changes in the Top 8 reported in Table 5. However, over the period in which it has been claimed that the share of illegal cigarettes has been increasing, market shares have been extremely stable. This suggests that the claimed expansion of illegal cigarettes must have affected the market shares of all existing brands – both premium and cheaper quality brands – about equally, which is hard to rationalise. This evidence suggests rather that there has not been a large increase in the share of illegal cigarettes, but that the share of the illegal cigarette market has remained small and constant.

Will there be a large increase in counterfeit or unbranded cigarettes following the introduction of PP? If removing brandings makes legal cigarettes less attractive, then unbranded cigarettes could be perceived as close, cheap substitutes for legal brands. However, if increased competition leads to lower branded prices, the gap between legal and unbranded cigarette prices should fall. Moreover, the cost of supplying unbranded cigarettes has increased as domestic production of tobacco has ceased in Australia. Tobacco must either be produced illegally or imported – both of which involve higher manufacturing cost than if legally produced. Tobacco is bulky and relatively low value compared with other illegal imports even though the fines may also be lower. Australia’s borders are easier to police than most other developed countries, which makes it a less-attractive destination for imported illegal tobacco than other countries So, unless the reduced differentiation substantially increases demand for unbranded cigarettes, their market appears likely to be less profitable in the future and an expansion in their market share unlikely.

Post PP, the future market for counterfeit cigarettes also looks less profitable. Their cost of production could fall as it is cheaper to make plain packages than to replicate the more elaborate branded packages. But, more plausibly, costs will rise if previously counterfeited cigarettes could be made for multiple countries, whereas post-PP packaging will need to be specifically devised for Australia. The anecdotes in Section 5.3.3 of Deloitte (2011) are consistent with this as they note that counterfeit cigarettes tend not to have health warnings. This suggests that counterfeiters will withdraw from the Australian market if it is not worthwhile making the changes to include health warnings. Otherwise, profits will fall as prices on counterfeit cigarettes fall due to greater competition from legal cigarettes as well as higher costs.

4. Conclusions and Final remarks

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Background on the Australian Cigarette Market
  5. 3. Effects of Plain Packaging on Competition and Market Structure
  6. 4. Conclusions and Final remarks
  7. References
  8. Appendices

Legislating for PP is likely to reduce the demand for cigarettes, to increase quit rates and therefore to lead to improved public health. The major objections that have been raised to this claim are that PP might (i) induce possible price cuts due to increased competition; and (ii) lead to increased counterfeiting and sales of unbranded cigarettes. These factors would tend to promote more cigarette consumption and to reduce the health benefits from the PP reform. The preceding analysis concludes that increased competition and price cuts are possible and this would, if left unaddressed, increase cigarette consumption. However, price falls on legal cigarettes can, however, be readily offset by excise tax increases. Indeed, the price cuts predicted by Padilla (2010) as a consequence of PP are much less than the price increases that followed the April 2010 increase in the excise. If there were further substantial price cuts, then further increases in the excise could be imposed to offset reductions in gross prices. As long as the tax increases primarily restored prices to their pre-PP level, then there would be no incentive for an expansion of the illegal cigarette market. Furthermore, as entry has proven very difficult following the restrictions on advertising in the early 1990s, it is unlikely that new low-price brands from major companies will be introduced which would substantially further lower prices.

In addition, our analysis suggests that substantial increases in unbranded or counterfeit cigarette supply are unlikely because of the less profitable market they will face after PP is introduced. If a problem did emerge with counterfeit cigarettes, it could be offset by increasing detection efforts, increasing penalties on suppliers and by replacing the plain-brown package with a complex but unattractive design.

This conclusion does not mean PP legislation will have strong effects in reducing demands. This depends on the dissuasive impact of PP on consumption. But, it is very unlikely that such policies would be counterproductive by increasing demands. A weak argument endorsing Australia’s adoption of PP policies is that they will have some positive effect in reducing demand without causing any harmful effects. An important gain is determining whether such policies will be very effective or not. Such innovative policies provide a “global public good.” There is often a Prisoners’ Dilemma case against delivering such public goods but, because the policies are likely to be non-disadvantageous, there are no extra costs if Australia is the first country to try out such policies. Indeed Australia has advantages over other developed countries in performing such an experiment. It is remote and physically isolated compared with European, developed Asian or even North American nations. This reduces problems of illegal cigarettes and private importing. Possibly, only New Zealand is better as a laboratory. Altruistic provision of global information on the effectiveness of PP should provide benefits in reducing smoking but, at worst, will cost Australia nothing and boost its image as a good global citizen.

  • 2

    Additional health problems can be caused by smoking illegal tobaccos (“chop chop”) which are often imperfectly cured. According to Bittoun (2004, p. 13), “The smoking and handling of chop chop has the potential to induce illness and possible fatality in those who use it. These illnesses may range from allergic reactions, chronic bronchitis, asthma, aspergillosis, alveolitis, pneumonitis, lung cancer to Legionnaire’s disease.”

  • 3

    The cigarettes in large packets weighed less than cigarettes in smaller packets.

  • 4

    To ensure cigarette trademarks can be used (except for packaging) and protected by their owners, the Trade Marks Amendment (Tobacco Plain Packaging) Bill was simultaneously passed.

  • 5
  • 6

    A third line of criticism is that the PP legislation is unconstitutional, but the debates in constitutional law are beyond the scope of this article.

  • 7

    Padilla (2010) discusses the role of advertising as signalling and describes how this can preserve margins. In Padilla’s argument, this is associated with conspicuous consumption. However, conspicuous consumption is not necessary for brands to have a signalling role. As Milgrom and Roberts (1986) argue, advertising is used to signal the quality of a new product where there is asymmetric information about quality. Advertised products will then tend to be high quality and those that are not, of lower quality. It is not required to observe consumption for these effects to operate.

  • 8

    There is mixed empirical evidence on this for restrictions in the United States. Holak and Reddy (1986) find greater price sensitivity following advertising restrictions, whereas Eckard (1991) finds greater mark-ups.

  • 9

    Both Holak and Reddy (1986) and Eckard (1991) find entry declines following advertising restrictions in the United States.

  • 10

    It is possible within the Sutton framework for concentration to fall after reducing advertising. However, the sunk costs of advertising and the savings in marginal costs from eliminating packaging would have to be considerable. This is unlikely to be the case for packaging.

  • 11

    This could either be from existing sellers expanding or new sellers entering.

  • 12

    For an example, see Kelton and Givel (2008).

  • 13

    Both documents refer to how discounting must avoid associations of low prices with low quality. Wills (undated) refers to using established brands or brands supported with extensive advertising.

  • 14

    The tax changes in 2001 ended favourable treatment for the large pack sizes, which led to relative price increases and a corresponding shift back to twenties, twenty-fives and thirties.

  • 15

    The difference between total brands from year to year does not always equal the difference in entrants and exits due to brands switching between being imported and being distributed by domestic firms.

  • 16

    This sort of churn is common in markets as discussed in Sutton (1997).

  • 17

    Contraband cigarettes, manufactured legally overseas but diverted to Australia, would presumably cease as the packaging would no longer match that in Australia.

  • 18

    Specifically, Pham and Prentice (2010) estimate a value for the parameter that captures this, σ, of 0.72, whereas Padilla (2010) varies σ between 0.1 and 0.9.


  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Background on the Australian Cigarette Market
  5. 3. Effects of Plain Packaging on Competition and Market Structure
  6. 4. Conclusions and Final remarks
  7. References
  8. Appendices
  • Bittoun, R. (2004), ‘The Medical Consequences of Smoking “Chop Chop” Tobacco’, prepared for the Commonwealth Department of Health and Aging, Sydney, December 2004.
  • British American Tobacco Australia (2011), ‘Submission on the Tobacco Plain Packaging Bill 2011’, 6 June. [accessed 20 April 2012] Available at:
  • Deloitte (2011), ‘Illicit trade of tobacco in Australia’, February 2011. [accessed 20 April 2012] Available at:
  • Department of Health and Ageing (2011a), ‘Tobacco Plain Packaging Bill 2011 Explanatory Memorandum’. [accessed 4 August 2012] Available at:
  • Department of Health and Ageing (2011b), ‘Consultation Paper: Tobacco Plain Packaging Bill 2011 Exposure Draft’. [accessed 4 August 2012] Available at:
  • Eckard, W. Woodward Jr (1991), ‘Competition and the Cigarette Tv Advertising Ban’, Economic Inquiry, 29 (1), 11933.
  • Germain, D., Wakefield, M.A. and Durkin, S.J. (2010), ‘Adolescents’ Perceptions of Cigarette Brand Image: Does Plain Packaging Make a Difference?’, Journal of Adolescent Health, 46 (4), 38592.
  • Hammond, D. and Parkinson, C. (2009), ‘The Impact of Cigarette Package Design on Perceptions of Risk’, Journal of Public Health, 31 (3), 34553.
  • Health Canada (1995), ‘When Packages Can’t Speak: Possible Impacts of Plain and Generic Packaging of Tobacco Products’, Expert Panel Report, Health Canada, March, 1995.
  • Holak, S.L. and Reddy, S.K. (1986), ‘Effects of a Television and Radio Advertising Ban: A Study of the Cigarette Industry’, Journal of Marketing, 50 (4), 21927.
  • House of Representatives Standing Committee on Health and Ageing (2011), ‘Advisory Report on the Tobacco Plain Packaging Bill 2011 and the Trade Marks Amendment (Tobacco Plain Packaging) Bill 2011’. August 2011, ACT, Canberra.
  • Kelton, M.H. Jr and Givel, M.S. (2008), ‘Public Policy Implications of Tobacco Industry Smuggling Through Native American Reservations into Canada’, International Journal of Health Services, 38 (3), 47187.
  • Milgrom, P. and Roberts, J. (1986), ‘Price and Advertising Signals of Product Quality’, Journal of Political Economy, 94 (4), 796821.
  • Padilla, J. (2010), ‘The Impact of Plain Packaging of Cigarettes in Australia: a Simulation Exercise - a Report for Philip Morris International’. [accessed 20 April 2012] Available at:
  • Padilla, J. and Watson, N. (2010), ‘A Critical Review of the Literature on Generic Packaging for Cigarettes – A Report for PMI’, 4 January. [accessed April 20, 2012]
  • Pham, V. and Prentice, D. (2010), ‘An Empirical Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry’, La Trobe University School of Economics and Finance Working Paper No. 8.
  • Philip Morris (undated), ‘Value Segment Synopsis – The Australian market’, Philip Morris Collection, Bates No. 2048568608/8613. [accessed 18 July 2008] Available at:
  • Quit Victoria (2011), ‘Plain Packaging of Tobacco Products: A Review of the Evidence’, Cancer Council Victoria, May 2011. [accessed 20 April 2012] Available at:
  • Scollo, M.M. and Winstanley, M.H. (eds). (2008), Tobacco in Australia: Facts and Issues, 3rd edn. Cancer Council Victoria, Melbourne. [accessed 20 April 2012] Available at:
  • Sutton, J. (1991), Sunk Costs and Market Structure. MIT Press, Cambridge MA.
  • Sutton, J. (1997), ‘Gibrat’s Legacy’, Journal of Economic Literature, 35 (1), 4059.
  • Symeondis, G. (2002), The Effects of Competition: Cartel Policy and the Evolution of Strategy and Structure in British Industry. MIT Press, Cambridge MA.
  • Walker, R. (1984), Under Fire: A History of Tobacco Smoking in Australia. University Press, Melbourne.
  • W.D & H.O Wills (Australia) Ltd (undated), ‘Value for Money Marketing in Australia’, Brown & Williamson Collection. Bates No. 621707306/7370. [accessed 18 July 2008] Available at:


  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Background on the Australian Cigarette Market
  5. 3. Effects of Plain Packaging on Competition and Market Structure
  6. 4. Conclusions and Final remarks
  7. References
  8. Appendices

Appendix I: The Padilla (2010) Model

An immediate effect of plain packaging is to reduce product differentiation, thereby making cigarette brands closer substitutes. This reduces prices and increases consumption. Padilla (2010), in a report for PMI, estimates that prices could fall from by 4.8–19.2 per cent and consumption increase by between 2.6–16.6 per cent. This appendix analyses this analysis and concludes it is unlikely that the larger estimates could eventuate.

Padilla calibrates a standard nested logit model of demand for differentiated products using product-level demand and cost data for 2008 provided by PMI. Brands of cigarettes are classified into three nests (premium, medium and low). The nested logit is a class of model often applied to analyse differentiated products. Plain packaging is modelled as removing all nests and increasing substitutability between products.

Pham and Prentice (2010) estimate a similar nested logit model for Australia using publicly available annual data for 1975–1984 and 1987–1992. Their results differ from Padilla’s. First, their own-price elasticities by brand are lower (from −1.99 to −3.77 rather than −8.1 to −9.5). That prices were much lower for most of the period they use will have contributed to this. For cigarettes as a whole, they estimate an own-price elasticity of −0.6 similar to estimates found in the literature. This is at the lower end of the two Padilla uses (−0.5 to −1). The own-price elasticity of −1 seems far too high.

Pham and Prentice also estimate a degree of substitutability between brands at the high end of the values Padilla uses.18 This suggests that cigarette brands are already fairly substitutable. The combination of low price elasticities and more limited scope for increasing substitutability between brands means that the likely price cuts and responsiveness of demand will be much lower than the estimates Padilla simulates. For example, when the overall elasticity of demand is −0.5, the greatest quantity response he gets without entry is 5.5 per cent.

In addition, his largest estimates arise when low-cost entry occurs. It is important to note that this form of entry is an assumption Padilla makes. It is not automatically an outcome of the demand model specified. The body of this article provides theoretical and empirical evidence based on previous restrictions on advertising that suggests such entry is unlikely.

Appendix II: The Data

In this appendix, the data provided in Tables 2 and 3 are discussed.

Two sets of data each for 1975, 1980, 1985, 1990, 1995, 2001, 2005 and 2010 are provided. Data for 1975 to 2001 were originally collected for Pham and Prentice (2010). This is now supplemented by data for 2005 and 2010.

The first data set is composed of the recommended retail prices for all varieties of cigarettes sold in Australian from the Australian Retail Tobacconist. This is a bimonthly trade journal that lists all brands and variants being sold in Australia and their wholesale and recommended retail prices. The June–July editions are used except for 1975 when the May edition was used.

The second data set is on market shares mainly for the largest brands. Pham and Prentice (2010) located in the Legacy Tobacco Documents Library market research reports from RJ Reynolds, Philip Morris and Wills as well as some Nielsen reports which include Australian national market shares mainly for the largest brands for 1975–1995. This is supplemented with market share data for the largest brands from 2001 to 2010 from the Global Market Information Database of Euromonitor International.

For Table 2, if there are multiple varieties for the same pack size for a brand (such as Mild and Extra Mild) the mean price is used. In practice, different varieties of a brand sold in the same pack size typically sell for the same per-stick price.

For Table 3, for 1980–1995 market shares are taken directly from market research reports. For 2010, estimates from Euromonitor are used.