Tobacco company profits and price elasticity of demand

The tobacco industry has not been disappointing investors even with the number of people giving up smoking. If you invested US$100 in US tobacco companies you would make a return of US$165. This is compared to US$154 for a similar amount invested in the tech-heavy NASDAQ. The margin on a cigarette sold has increased from 50% to 60% with cigarette and cigar makers expected to make an operating profit of US$22bn.

So why has the industry not been impacted by approximately 20m people in the US giving up smoking and the number of cigarettes sold falling by over 33%? It comes down to the simple concept of price elasticity of demand. As casual smokers have quit, the remaining smokers tend to be more addicted and less sensitive to price changes. This has allowed tobacco companies to raise prices more aggressively. Over time, cigarette prices in America have risen much faster than overall inflation — for example, while general prices increased by about 3% last year, Marlboro prices rose by over 7%.

Manufacturers cannot perform this trick indefinitely: at some point even the most determined smokers will die, quit or switch to black-market cigs. The Economist.

Source: The Economist – The counterintuitive economics of smoking. 26th October 2025

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