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The Tobacco Deal

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Author Info

  • Jeremy Bulow

    (Graduate School of Business, Stanford University, USA)

  • Paul Klemperer

    (Nuffield College, Oxford University, UK)

Abstract

[Forthcoming in Brookings Papers on Economic Activity] We analyse the major economic issues raised by the 1997 Tobacco Resolution and the ensuing proposed legislation that were intended to settle tobacco litigation in the United States. By settling litigation largely in return for tax increases, the Resolution was a superb example of a "win- win" deal. The taxes would cost the companies about $1 billion per year, but yield the government about $13 billion per year, and allow the lawyers to claim fees based on hundreds of billions in “damages”. Only consumers, in whose name many of the lawsuits were filed, lost out. Though the strategy seems brilliant for the parties involved, the execution was less intelligent. We show that alternative taxes would be considerably superior to those proposed, and explain problems with the damage payments required from the firms, and the legal protections offered to them. We argue that the legislation was not particularly focused on youth smoking, despite the rhetoric. However, contrary to conventional wisdom, youth smokers are not especially valuable to the companies, so marketing restrictions are a sensible part of any deal. The individual state settlements set very dangerous examples which could open up unprecedented opportunities for collusion throughout the economy, and the multistate settlement of November 1998 is equally flawed. The fees proposed for the lawyers (around $15 billion) and the equally remarkable proposed payoff for Liggett (perhaps $400 million annually, for a company with a prior market value of about $100 million) also set terrible examples. We conclude with some views about how public policy might do better.

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Bibliographic Info

Paper provided by EconWPA in its series HEW with number 9904002.

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Length: 63 pages
Date of creation: 09 Apr 1999
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Handle: RePEc:wpa:wuwphe:9904002

Note: Type of Document - Tex/pdf; prepared on IBM PC ; to print on HP/PostScript/; pages: 63; figures: included. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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References

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  1. Kenneth Elzinga & David Mills, 1997. "The Distribution and Pricing of Prescription Drugs," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 4(3), pages 287-300.
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Citations

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Cited by:
  1. Sandeep Dahiya & David Yermack, 1999. "Wealth Creation and Destruction from Brooke Group's Tobacco Litigation Strategy," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-050, New York University, Leonard N. Stern School of Business-.
  2. DeCicca, Philip & Kenkel, Donald & Liu, Feng, 2013. "Excise tax avoidance: The case of state cigarette taxes," Journal of Health Economics, Elsevier, vol. 32(6), pages 1130-1141.
  3. Klemperer, Paul, 2000. "Why every Economist should Learn some Auction Theory," CEPR Discussion Papers 2572, C.E.P.R. Discussion Papers.
  4. Rosemary J. Avery & Donald S. Kenkel & Dean R. Lillard & Alan D. Mathios, 2006. "Regulating Advertisements: The Case of Smoking Cessation Products," NBER Working Papers 12001, National Bureau of Economic Research, Inc.
  5. Ciliberto Federico & Kuminoff Nicolai V, 2010. "Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-46, July.
  6. Wei Tan, 2006. "The Effects of Taxes and Advertising Restrictions on the Market Structure of the U.S. Cigarette Market," Review of Industrial Organization, Springer, vol. 28(3), pages 231-251, 05.
  7. Robert A. Ritz, 2008. "Cost pass-through under delegation," Economics Series Working Papers 404, University of Oxford, Department of Economics.
  8. Binmore, Kenneth & Klemperer, Paul, 2002. "The Biggest Auction Ever: The Sale of the British 3G Telecom Licences," CEPR Discussion Papers 3214, C.E.P.R. Discussion Papers.
  9. Delipalla, Sophia & O'Donnell, Owen, 2001. "Estimating tax incidence, market power and market conduct: The European cigarette industry," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 885-908, May.
  10. John Tauras & Richard Peck & Frank Chaloupka, 2006. "The Role of Retail Prices and Promotions in Determining Cigarette Brand Market Shares," Review of Industrial Organization, Springer, vol. 28(3), pages 253-284, 05.
  11. B. Coestier & E. Gozlan & Stephan Marette, 2003. "La responsabilité des entreprises et le risque d'obésité," THEMA Working Papers 2003-42, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  12. David Cutler & Jonathan Gruber, 2001. "Health Policy in the Clinton Era: Once Bitten, Twice Shy," NBER Working Papers 8455, National Bureau of Economic Research, Inc.

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