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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.

Suggested Citation

  • Ciliberto, Federico & Kuminoff, Nicolai, 2010. "Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry," MPRA Paper 24883, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:24883
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    References listed on IDEAS

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    Cited by:

    1. Dan Hanner & Ginger Zhe Jin & Marc Luppino & Ted Rosenbaum, 2016. "Economics at the FTC: Horizontal Mergers and Data Security," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(4), pages 613-631, December.

    More about this item

    Keywords

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

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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