There are also major public health benefits of introducing RPI-X type price regulation. It would remove the possibility of previously documented collusive price fixing,26–29
since prices would now be set by the regulator rather than by the firms themselves. It could also limit the use of price as a marketing tool,30
since differences between companies/brands would simply be based on genuine costs of production rather than attempts to segment the market through price. By significantly reducing price differentials, it would prevent down-trading to cheaper brands, a trend which has increased in numerous markets in recent years.31–33
Moreover, if prices and taxes were applied to hand-rolled and other smoked tobacco products in a similar way as to cigarettes, as they should be, regulation could also be used to prevent down-trading to hand-rolled products.33 34
In order to set the price caps OFSMOKE would inevitably need to closely monitor the industry, and this could help highlight, and ultimately eliminate, other practices including youth marketing35
and cigarette smuggling.36
For example, if, despite marketing restrictions, companies continued to actively and inappropriately promote their products to youth, then promotional budgets could be given limited allowances during the price review process by identifying these activities as targets for the efficiency savings. This would have the added benefit of requiring companies to disclose their promotional activities as currently required in Canada, for example.37
Even if marketing spend was not specifically targeted in this way, the system would indirectly limit the industry's marketing budget by removing its ability to re-use its efficiency savings, which for some companies have been substantial in recent years.38
The system of regulation could also be structured to help address the problem of tobacco smuggling. For instance, the price controls established would be based solely upon legal sales, which would give the manufacturers a direct incentive to help combat smuggling since the production costs of illicit sales would be ineligible to be counted as a legitimate expense, and any revenue gained from smuggled products would be more readily identified. Furthermore, we might even imagine a regime that includes penalties triggered by smuggling rates: high smuggling and black market sales would result in lower future prices for legitimate sales by way of a penalty for undesirable actions (or the lack of desirable actions).
The scope of regulation is also potentially flexible. Governments could set the scope of price regulation fairly narrowly on cigarettes and other smoked tobacco products or, should the policy of harm reduction find favour, more broadly on all tobacco products, or all nicotine products including pharmaceuticals. Thus governments could use the system to help direct changes it desires.
While a narrow focus on price regulation could have the advantage of reducing the likelihood of regulatory capture by the industry, since such regulation is relatively straightforward and has a documented record of success in other areas, the regulatory remit could, over time, be expanded beyond price. This could occur in a number of directions to address, for example, product content, marketing, distribution, access and underage sales that the manufacturer and retailer, in varying degrees, could be held responsible for. Such increased remit would bring the system in line with proposals for more comprehensive tobacco market regulation that have previously been made39
and might have a number of advantages. First, it might allow for greater integration and consistency in tobacco policy. Second, by addressing price, access to and promotion of all nicotine products within one regulatory system, it could help address the current imbalance in the nicotine market in which the most harmful nicotine delivery products (cigarettes) are the most accessible and the least harmful (pharmaceutical products) the least accessible.40 41
The issue of underage sales is somewhat more complex as both the manufacturer and the retailer could be held responsible, but could also be addressed, at least in theory, if, for example, companies were held ineligible to profit from underage tobacco sales.
The most obvious benefit of RPI-X regulation, however, is the direct reduction in the tobacco industry's profit, because this will directly reduce the incentive and ability of tobacco companies to fight public health measures. Not only will the companies have fewer funds available to do this, but the industry would also be partially insulated against tobacco control measures and less able to argue that they would have negative economic impacts. When setting future price controls, OFSMOKE would take into account past and likely future changes to tobacco policy and if this included public health measures which would directly affect the industry, it would need to reflect the new constraints in the regulated prices the industry would be allowed to charge. Thus by removing some of the potential adverse affects on industry profitability, the system of RPI-X regulation would help reduce industry resistance to effective public health policy and would be a more practical means of doing so than previous proposals.