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

Listed author(s):
  • Ciliberto, Federico
  • Kuminoff, Nicolai

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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File URL: https://mpra.ub.uni-muenchen.de/24883/1/MPRA_paper_24883.pdf
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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
Handle: RePEc:pra:mprapa:24883
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Web page: https://mpra.ub.uni-muenchen.de

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  7. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
  8. Chaloupka, Frank J. & Warner, Kenneth E., 2000. "The economics of smoking," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 29, pages 1539-1627 Elsevier.
  9. Peter Arcidiacono & Holger Sieg & Frank Sloan, 2007. "Living Rationally Under The Volcano? An Empirical Analysis Of Heavy Drinking And Smoking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 37-65, 02.
  10. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  11. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
  12. Gale, H. Frederick, Jr. & Foreman, Linda F. & Capehart, Thomas C., Jr., 2000. "Tobacco And The Economy: Farms, Jobs, And Communities," Agricultural Economics Reports 34007, United States Department of Agriculture, Economic Research Service.
  13. Mark Coppejans & Donna Gilleskie & Holger Sieg & Koleman Strumpf, 2007. "Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 510-521, August.
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  15. Sumner, Daniel A, 1981. "Measurement of Monopoly Behavior: An Application to the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 1010-1019, October.
  16. Ashenfelter, Orley & Sullivan, Daniel, 1987. "Nonparametric Tests of Market Structure: An Application to the Cigarette Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 483-498, June.
  17. Sobel, Russell S & Garrett, Thomas A, 1997. "Taxation and Product Quality: New Evidence from Generic Cigarettes," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 880-887, August.
  18. Mark J. Roberts & Larry Samuelson, 1988. "An Empirical Analysis of Dynamic, Nonprice Competition in an Oligopolistic Industry," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 200-220, Summer.
  19. Barzel, Yoram, 1976. "An Alternative Approach to the Analysis of Taxation," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1177-1197, December.
  20. Sullivan, Daniel, 1985. "Testing Hypotheses about Firm Behavior in the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 586-598, June.
  21. Igal Hendel, 1999. "Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 423-446.
  22. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
  23. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
  24. Showalter, Mark H., 1999. "Firm behavior in a market with addiction: the case of cigarettes," Journal of Health Economics, Elsevier, vol. 18(4), pages 409-427, August.
  25. Jérôme Adda & Francesca Cornaglia, 2006. "Taxes, Cigarette Consumption, and Smoking Intensity," American Economic Review, American Economic Association, vol. 96(4), pages 1013-1028, September.
  26. Kellie Curry Raper & H. Alan Love & C. Richard Shumway, 2007. "Distinguishing the Source of Market Power," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 78-90.
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