In recent weeks controversy has raged over the effectiveness of the previous Australian Federal government’s plain packaging policy for cigarettes. The point in bitter contention has been the outcome of that policy design. Free-range economists and those in more or less close proximity to the original policy decision, as well as their fifth column supporters, have thrown frothy invective as unappealing as the medical warnings emblazoned across a pack of durries. The policy decision created a natural experiment for considering economic and public health policy implications. It also provides an extraordinary insight into the mechanics of brand and their market shifting consequences. In short, removing branding changed the behavior of individuals in a way that was completely unintended by the designer and can be considered design failure as measured against the designer’s intentions.
Nonetheless, to discover the mechanism of operation it is usually necessary to go to the boundaries of failure for a phenomenon. In this instance the policy designer failed against its own criteria for success, as there is no evidence for a decline in the total number of cigarettes consumed. Here we are seeking to disclose the effect of brand by exploring a circumstance where brand differentiation has been totally and instantly removed.
The Australian Federal government was the first internationally to implement a plain packaging policy for a legal product. Many governments internationally have considered following their lead. The rise in the prominence of Behavioral Economics and its promise to be able to nudge the recalcitrant individual makes this a hot topic. Perhaps in this worldview the pathologised individual doesn’t know what is best. Worse still, evil producers are possibly manipulating them. Policy authors have a rational intention. The question is why aren’t individuals behaving according to that plan?
The stated intention of the policy was to discourage people from smoking by removing the signals that branded packaging provides; the complex set of subtle messaging that a consumer aspires to. Despite the then minister’s representations of substantial research to support the policy decision none had been made available at the time or discovered since. Instead the policy design appears to have been motivated by a desire to do something in light of her family experience with cancer. This appeared to be policy by normative judgment. The intention was clearly to strip cigarettes of the perceived intangible values associated with smoking by implementing policy to limit the choices of producers and law-abiding consumers. As made clear by Henry Ergas (here) this was not an economic issue. Treasury had made clear taxes raised from cigarette consumption exceeded the cost to the public of smoker’s habits.
The answer to why this world first policy intervention may not have succeeded can be uncovered by close consideration of the mechanism of brand and the role it plays in exchange. The intention of branding a product is usually to sustain a higher net margin by comparison to a commodity strategy of selling volume based on price. Branding allows the consumer to discriminate between one offering and another on a set of criteria greater than price alone; and to select the offer that most fits with their intentions.
At Marque’d we say that ‘brand is the definition of us’ that is a precise description of all that the offering stands for. The more precise that definition the easier it is for a consumer to select and to continue to know why they choose. This has long-term value to the brand. In this sector, brands had been well established and consumers were very discriminating. Anyone who ever waited in line at the local news agency knows how precise a consumer’s loyalty was to his or her brand.
Since the implementation of plain packaging total revenue for cigarette sales has declined. However that was not the intention of the policy designer. What appears to have happened is consumers, with less brand information available to form the basis of discrimination, have chosen to shift down. It is contested that consumers faced with a commodity purchase are now buying more volume of a cheaper product. This would be a massively unintended consequence of the policy designer’s nudging.
As Nobel Prize winner F.A. Hayek so famously said, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
Brand allows consumers to make more informed decisions. Devoid of any information beyond price, it appears that cigarette smokers may choose to buy more of a cheaper product. This appears to conclusively demonstrate that brand allows consumers to realize more tangible and intangible value. That value had, till plain packaging day, been realized in exchange by the producers, and therefore it substantially supports the significant value of a brand.
It would be prudent to make clear some Hail Mary caveats. Marque’d do not now and have never worked for any organisation associated with the production, marketing, retail (except for a casual job as a junior in a supermarket back in the 90s) or provision of advice to manufacturers of cigarettes. We don’t smoke. We don’t advocate smoking. Frankly, more than one of us holds our breath while walking past people smoking. Marque’d however, respect choice above all else and believe it is central to human flourishing. Furthermore, we acknowledge Professor Sinclair Davidson of RMIT is a PhD supervisor for one of the authors of this blog. Professor Davidson has been an outspoken commentator on the efficacy of this policy (see here, here and here).