Plain packaging has arrived. As of May this year, all cigarette packets must be standardised, with the same murky green colour, font, size, and alignment of text on boxes. Over two thirds of every cigarette box will now be devoted to graphic health warnings.10-packs, once the preserve of the social smoker, will also be a thing of the past, as the thinner packets have been deemed too small to properly display the tumours, corpses and rotting teeth that smokers are now required to contemplate before lighting up.The underlying premise of the policy, and the research used to justify it, is that by making the packaging unattractive you will reduce demand for cigarettes. However, this approach completely ignores how tobacco companies will respond to the change – it is a partial equilibrium analysis, which ignores supply responses further down the line.The policy was introduced in Australia in 2012, and since then, cigarette consumption has fallen, in keeping with general trends away from smoking across the country. However, as this handy graph from City AM shows, this is a clear example of correlation, not causation. There was a huge confounding factor, namely a hefty tax hike the following year, which may well account for the bulk of the slump – or even all of it. Consumption of cigarettes was actually rising until the 2013 tax increase.With only one type of packaging to copy, standardisation of cigarettes is also a boon to counterfeiters. In Australia, there has been a sharp increase in contraband tobacco since plain packaging was introduced; government seizures of black-market tobacco rose by 60% between 2011-12 and 2012-13.Certainly, economic theory – and simple common sense – suggest that the policy will not have the desired effect here in Britain.Tobacco manufacturers will oppose the changes, but ironically, in one sense, they will also benefit from them (and some may even secretly welcome them). This is because investing in product design has elements of an arms race. Each individual manufacturer might prefer to spend less on it (just like both the USA and the USSR would have preferred to spend less on missiles), but you cannot unilaterally opt out; you cannot spend less on product design unless your competitors do likewise. You do not want to be the only company with a plain pack when all the other companies produce flashy packs. Plain packaging, in this sense, is like an enforced disarmament treaty.We can conclude that the price of cigarettes will go down under the plain packaging regime, as manufacturing costs fall. Cigarette companies will make significant production savings, as all packaging for all of their lines will be exactly the same, and much simpler. In the new regulatory environment, tobacco manufacturers will initially have greater profit margins, which will soon enough be passed on to consumers in the form of price cuts. Assuming that current tax rates on cigarettes stay the same, this price reduction may well offset any benefit from the fall in demand that policy makers expect.Moreover, by reducing the number of characteristics cigarette brands can use to differentiate themselves, cigarette makers will be left with only two features to differentiate themselves in this crowded market: price and taste.You may believe, as I do, that taste is actually fairly low on the list of priorities for smokers. In blind trials, smokers have often struggled to distinguish between well-known brands. This leaves only the price, so expect more intense price competition.The logic of plain packaging is to reduce the appeal of smoking through unattractive packs and unsightly health warnings. But the outcome of all this may be for smokers to alter their habits, rather than ditching them altogether.If much of the cachet of smoking comes from being seen to smoke a particular luxury brand, and that cachet is removed, consumers will just switch to cheaper alternatives. After all, why would any smoker buy Sobranies at £15 or Marlboro at £11 if they looked identical in every way to Pall Mall or Mayfair at £6-7? Those who have made the switch will end up with more disposable income to purchase more cigarettes – and to invest in add-ons like cigarette cases, which will mitigate the unsightly packaging.Public health bodies often point to Big Tobacco’s opposition to plain packaging as an example of the policy’s success. But, as usual, they’re missing the point. While it’s true that tobacco firms oppose the policy, this is not because they are worried about losing their core consumer base as people turn away from smoking altogether. An individual tobacco manufacturer is not interested in the overall size of the tobacco market. They are interested in their own market share; they see product design as a tool to influence that share, and they are reluctant to lose that tool.It could well be that the overall size of the market will shrink – the size of the legal market, that is. But if Australia’s experience is anything to go by, it won’t take long before smugglers and counterfeiters will fill that gap.