Is illicit tobacco demand sensitive to relative price?

A tough fiscal stance has become the norm for discouraging tobacco consumption. Tax and excise rises serve to increase the price of licit relative to illicit tobacco. Consequently there has been a rise in black market tobacco consumption. This paper investigates the degree of substitution between licit and illicit tobacco using novel survey data. We find that illicit tobacco smokers are sensitive to the price ratio between licit and illicit tobacco. This implies that high tobacco taxes have spillover effects that need to be accounted for in policy evaluation.