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Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry

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  • Ciliberto, Federico
  • Kuminoff, Nicolai

Abstract

This paper investigates the large and unexpected increase in cigarette prices that followed the 1997 Master Settlement Agreement (MSA). We integrate key features of rational addiction theory into a discrete-choice model of the demand for a differentiated product. We find that following the MSA firms set prices on a more elastic region of their demand curves. Using these estimates, we predict prices that would be charged under a variety of industry structures and pricing rules. Under the assumptions of firms’ perfect foresight and constant marginal costs, we fail to reject the hypothesis that firms collude on a dynamic pricing strategy.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24883.

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Date of creation: 17 Jul 2010
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Handle: RePEc:pra:mprapa:24883

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Keywords: Cigarettes; Master Settlement Agreement; Demand; Collusion; Rational Addiction.;

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