Background:
The cigarette market in Bangladesh is segmented into four brand categories-low, medium, high and premium. These brands are differentiated by flavor, mildness, filter, and packaging. Smokers choose brands based on their preference for these product characteristics that closely interact with the affordability of different cigarette brands. Despite wide variation in price and product characteristics, brands can be close substitutes due to their addictive nicotine content, a feature that can trigger switching of brands in response to change in market price and income of smokers.

Methods:
We use nationally representative cohort data on smokers from four waves of International Tobacco Control (ITC) Policy Evaluation Survey conducted over 2009-2015. First, we specify a multinomial logit model to identify the determinants of brand choice. Second, we specify four conditional demand functions of daily cigarette consumption for four brand categories and estimate own- and cross-price elasticities and income elasticity of cigarettes in each category. Both models are estimated using pooled ordinary least squares and fixed effects methods.

Results:
The results of estimation show that increase in own price decreases the probability of choosing a brand in a category. Price increase of other brands increases the probability of choosing in that brand category suggesting substitutability. The own-price elasticity is negative and statistically significant for medium and high brands and statistically insignificant for low and premium brands. The cross-price elasticities are positive, suggesting that brands are substitutes and that smokers have incentive to switch down to cheaper alternatives in the event of price increases, instead of quitting or cutting down consumption.

Conclusions:
Increasing cigarette excise tax to induce price increases for cigarettes can prove ineffective in achieving the objective of reducing smoking under price and product differentiation, which need to be minimized through uniform specific excise system that tends to reduce the variability of price and product regulation.