Regulation and promotion of an addictive product : Spanish tobacco business in the spread of cigarette consumption (1880s to 1930s)

Tobacco is an addictive product, a big business and an important source of fiscal revenues. From 1880s to 1930s tobacco consumption spread in Western World mainly in the form of cigarettes. Supply changes such as mass production techniques, mass distribution and brand advertising and demand changes such as growing GNP or urbanization levels, interacted explaining changes and convergence in international consumption patterns. However, some differences have to be found regarding the national regulation framework. Tobacco industry was organized either under a fiscal monopoly or under a highly taxed industry mainly within an oligopoly. This paper analyses in depth and on a comparative basis, the Spanish case, paying special attention on the difference made by the regulatory framework and the lack of development of modern business tools such as brand advertising on consumption patterns and business activity. Spanish consumers were behaving as expected in the economic literature on addiction (rational addiction model) without brand advertising. That has to be related with the addictive character of tobacco consumption and more specifically with industrial organization of Spanish tobacco market. This is consistent with what is found in economic literature about addiction and market structure: for oligopoly or monopoly, if marginal cost is increasing, supply of an addictive good may be as high or higher than for perfect competition. This paper concludes that brand advertising is essential for market share mechanisms but its relation with the expansion of tobacco market is not as clear as it could be found on policies banning tobacco advertising or in Business and economic history literature. The lack of branding development in the Spanish case is just a consequence of the fact that tobacco industry was organized in Spain under a fiscal monopoly, and it was the lack of competence of the monopoly that make the Spanish products non-competitive, and as a matter of fact, the opportunities for a traditional tobacco producer of exporting or becoming a foreign direct investor were lost in Spain.