A study of the causes of the real net-of-tax cigarette price increases in South Africa (1990-2012)

Nyabongo, Diana

A study of the causes of the real net-of-tax cigarette price increases in South Africa (1990-2012)

Master Thesis

2014

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

From the 1990's onwards the cigarette industry in South Africa has imposed substantial increases in the real net-of-tax price of cigarettes. Past research has presented various possible reasons for this increase, however none of this research has incorporated the effect that the international environment might have on price setting in the cigarette industry through tariffs. Using a Bertrand duopolistic model this paper presents a theoretical model to explain the effect that tariffs, and other relevant causal factors such as excise taxation might have on the real net-of-tax price. The relationships that exist between the real net-of-tax price and causal factors are then subjected to a preliminary analysis using an Autoregressive Distributed Lag Model. The results indicate that there is a relationship between the price of cigarettes and various causal factors. The results do not however substantiate what caused the real net-of-tax price increase from 1990's onwards. The paper attributes this to various limitations in the preliminary analysis process and suggests how these could be rectified. The paper hence presents a useful foundation to understanding the nature of the existing relationships between the price of cigarettes and various causal factors and how best these can be modelled.

Description

Includes bibliographical references.

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