NCPA - National Center for Policy Analysis

Higher Cigarette Prices Lead To Gray Market Diversion

January 28, 1999

Since U.S. cigarette-makers raised their prices to offset the costs of legal claims, cigarettes are being sold at stores and over the Internet at substantial discounts. Domestic cigarette prices have increased an average of 50 percent over the past two years -- but so-called "diverted" cigarettes sell for discounts of as much as 25 percent.

The flood of diverted cigarettes has led to inquiries by state and local regulators.

  • Cigarettes are diverted when those made by a U.S. manufacturer for foreign markets, where prices are lower, find their way into U.S. markets -- either by being re- imported or by appearing on U.S. shelves without ever leaving the country.
  • Although the practice is legal now, the 1997 Balanced Budget Act imposes stiff fines on anyone caught selling or distributing diverted tobacco products as of 2000.
  • Experts predict enforcement of the law will be difficult and lax, however -- although the Bureau of Alcohol Tobacco and Firearms says it anticipates an increase in funding to enforce the new law.

While cigarette-makers say they cannot quantify exactly the sales of diverted tobacco products, a spokeswoman for R.J. Reynolds says the practice has "dramatically escalated in recent months."

Source: Suein L. Hwang, "As Cigarette Prices Soar, a Gray Market Booms," Wall Street Journal, January 28, 1999.


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