In highly influential research published by the National Bureau of Economic Research, Sandra L. Decker and Amy Ellen Schwartz reached a curious conclusion. They found that higher alcohol prices decrease alcohol consumption and smoking participation (suggesting a complementarity in consumption). Higher cigarette prices tend to reduce smoking participation but increase drinking (meaning substitutability in consumption). Their research titled “CIGARETTES AND ALCOHOL: SUBSTITUTES OR COMPLEMENTS?” is provided with this examination. If their research is valid, then it will be tough for the government to decide whether to tax alcohol or tobacco or both.
Imagine that you are working for a corporate strategy firm that advises corporations about governmental relations. A tobacco manufacturer approaches you for consulting services. They want you to look at the sin taxes that affect their business. They acknowledge that a sin tax, whether levied on alcohol or tobacco, will always reduce the demand for their product. They want to avoid that by arguing that sin taxes imposed on tobacco might increase alcoholism and drunk driving. That might pose an additional burden on society and affect the insurance market. They want to argue that taxes levied on tobacco might increase drinking and lead to higher chances of alcohol-related diseases and drunk driving-related death and injury.
However, your existing client is a manufacturer of alcohol products, and they like the tobacco taxes as they might increase the demand for alcohol. Your firm also wants to court a life insurance company, but taking a side with the higher tobacco taxes might make them unhappy. An increase in drunk driving might lead to more accidents and deaths, adversely affecting the life insurance company’s business.
Given the situation’s complexity, your corporate leaders want to meet for a brainstorming and strategy session. The leadership wants you to make a comprehensive presentation about your firm’s business and client relationship strategy, keeping in mind the conflicting needs of various existing and future clients. Your company’s financial success, reputation, and, ultimately, your job depend on your presentation. In other words, you are now a key participant in a very high-stakes scenario analysis that might make or break your career.
Write a memo for your leadership articulating and analyzing various challenges and recommendations regarding the path you think the firm should take.
