The demand for cigarettes has shrunk over several years mostly due to regulation, taxation, and health campaigns.
These have all lowered consumption of cigarettes and pushed consumers into purchasing substitutes. Electronic cigarettes (e-cigs) are one such substitute. The addictive nature of cigarettes (nicotine) was once a reason why even though price increased and income stayed the same people continued to purchase cigarettes. Now, as a direct result of improved technology, e-cigs can deliver the nicotine with fewer health problems. E-cigs do not give off smoke/smell which reduces some of the cost of being a cigarette smoker. The water vapor is not harmful to those around, so in areas of the United States banning smoking inside, e-cigs could circumvent this cost to smokers. We have all seen those poor people sitting outside a restaurant with a cigarette in the rain.
E-cigs currently are less regulated and cost less than regular cigarettes, but this may change. As countries see consumers substituting to e-cigs they may begin to regulate e-cigs the same way as cigarettes. Currently e-cigs are not perfect substitutes for cigarettes. If cigarettes and e-cigs were perfect substitutes, when prices rose on cigarettes consumers would switch over to e-cigs. The price of e-cigs should then rise to the same amount that cigarettes were at before. This will not happen to e-cigs due to the fact that there is not the “sin” tax added on top of e-cigs that normal cigarettes have. Therefore the price of e-cigs will not equal the price of cigarettes unless a similar tax is imposed. E-cigs are substitutes for cigarettes but not perfect substitutes, which in this case could encourage cigarette smokers to switch to e-cigs.