South Africa successfully reduced smoking prevalence by substantially increasing tobacco excise tax and therefore real cigarette prices between 1993 and 2010. Tobacco market structure changed in 2010 following the entry of local tobacco companies and the introduction of cheaper cigarette brands. Illicit cigarettes have also increased significantly. This paper estimates price elasticities of smoking prevalence by gender and examines the effect of an increase in illicit cigarettes and changes in tobacco market structure on smoking behavior in South Africa. Two nationally representative longitudinal data sets and cigarette price data from Statistics South Africa, are used. We use pooled fractional probit correlated random effects and panel LPM models for estimation. Smoking prevalence and price sensitivity are higher among males than among females. Price elasticity of smoking prevalence is about -0.33 overall, -0.43 for males and -0.20 for females. The increase in illicit cigarettes and availability of cheaper brands reduce the effect of price on smoking prevalence and undermine tobacco control policy. The relatively price-inelastic demand implies that there is room for an increase in excise tax on cigarette. We recommend a further increase in excise taxes on tobacco and implementing a track and trace system to control illicit trade.
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