Date of Award
Master of Science
Gregory K. Pompelli
William Park, Darrell Mundy
The recent overhaul of the tobacco program was prompted in part by the increased use of imported tobacco in domestic cigarette manufacturing. A large portion of the blame for the loss in market share was placed on the high U.S. support prices for domestically produced tobacco. A more market oriented tobacco program was instituted to make U.S. tobacco more price competitive in both the domestic and export markets.
The purpose of this study was to examine the demand for tobacco and analyze the nature of the price linkages occurring within the domestic market. Price and expenditure linkages for the entire domestic market were examined, and these linkages were also studied for the components of tobacco imports. The Almost Ideal Demand System (AIDS) of Deaton and Muellbauer (1980a, 1980b) was applied to model the domestic market and the import market from 1971-1986.
In the domestic market, prices are a significant determinant of budget shares. The demand for domestic flue-cured tobacco reacts strongly with changes in the price for imported flue-cured and hurley tobacco. A price increases in one of these tobacco types will produce a significant increase in the other's market share. Domestic hurley tobacco and oriental tobacco are relatively secure in the U.S. market with limited substitution available for these tobaccos.
Prices are an important determinant of import market shares as well. Additionally, the decreasing average nicotine content of U.S. cigarettes has a significant role in the manner in which the U.S. imports tobacco. Brazil and Canada have benefitted in the import market, while Greece and Mexico are adversely affected by the lowering of the nicotine level.
Tobacco imports arrive in the U.S. from countries operating under democratic and centrally planned governments, and from countries in various stages of economic development. Tobacco imports can therefore be classified by the economic group of its source, i.e. imports originating from developed, less developed, or centrally planned economies. The import price of an economic group's tobacco was found to play a marginal role in how the U.S. imports tobacco. The wide variances of individual country prices within an economic group limits the inferences possible from this type of disaggregation. Developed countries were found to be, on average, a low price import, suggesting that factors such as government subsidies may play a part in determining market shares.
The findings of the study indicated generally inelastic demands for each type of tobacco. Elastic price responses were found for imported flue-cured and burley tobacco in the domestic market. In the import market, elastic price responses were found for Greece, Canada, and centrally planned countries. The elasticities are subject to skepticism however, since some own-price elasticities were positive.
Coady, Sean A., "Derived demand for tobacco by type and origin. " Master's Thesis, University of Tennessee, 1989.