Dear Economist

Should I pay more for a guilt-free smoke?

Dear Economist,
I notice that my tobacco packet includes merely a helpline number for people who want to quit, and not a grotesque picture of someone in the advanced stages of a smoking-related disease. This leads me to conclude that I might be prepared to pay more for my tobacco if its legally required guilt trips were in text form rather than pictures. Am I on to something?
Ms Lovegrove, Oxford

Dear Ms Lovegrove,

I think you just might be. The pictures you describe are a form of “product sabotage”, a tactic used by companies with some pricing power. Some customers are very sensitive to price while others pay less attention to it. The sensible business, then, will try to separate the two groups and charge them different prices for similar products. This can be easier if the cheaper product is given some additional defect that the price-sensitive customer will swallow and the price-blind customer will not.

Examples abound. Tesco Value products are cheap, but the packaging reminds me of an emergency food drop from the United Nations. The “short cappuccino” from Starbucks is cheap – and not advertised on the menu. Most software packages have a cheaper version in which features are disabled at the vendor’s expense. Some hardware does, too.

The government could allow the sale of tobacco under two different conditions: the current version, with tax and disturbing pictures, and a “guilt-free” version with no pictures but a higher tax. The effect would be something to test, but I would expect school children and the poor to choose the traditional version, while older and more affluent smokers would buy the premium version. I would guess that with two different schemes available, the government should be able to discourage more smokers while also raising extra cash.

Or perhaps I am just smoking something.

Also published at ft.com.

9th of May, 2009Dear Economist • Comments off