Excise gap and price in the Italian cigarette industry

We provide evidence that tax shifts in the Italian cigarette industry are not homogeneous across price categories and are associated with differences in the excise structure. We take the gap between excise on lower and higher price categories as a proxy for unbalanced tax changes and, abstracting from strategic behaviour of manufacturers, we estimate the effect and the significance of a change in the excise gap, as long as in the tax level, on the market average price. We find that unbalanced tax increases are likely to negatively affect the average price towards the low end of the price category. As a result, the potential impact of taxation increase on price is reduced.