Ciliberto, Federico and Kuminoff, Nicolai (2010): Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry. Published in: The B.E. Journal of Economic Analysis & Policy [Frontiers] , Vol. 10, No. 1 (17. July 2010)
Download (399Kb) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry|
|Keywords:||Cigarettes, Master Settlement Agreement, Demand, Collusion, Rational Addiction.|
|Subjects:||L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
L - Industrial Organization > L4 - Antitrust Issues and Policies > L41 - Monopolization; Horizontal Anticompetitive Practices
H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm
|Depositing User:||Federico Ciliberto|
|Date Deposited:||11. Sep 2010 10:08|
|Last Modified:||12. Feb 2013 11:37|
Adda, Jerome and Cornaglia, Francesca. "Taxes, Cigarette Consumption, and Smoking Intensity." American Economic Review, 2006, 96(4), pp. 1013-28.
Arcidiacono, Peter, Sieg, Holger and Sloan, Frank. "Living Rationally under the Volcano? An Empirical Analysis of Heavy Drinking and Smoking." International Economic Review, 2007, 48(1), pp. 37-65.
Ashenfelter, Orley and Sullivan, Daniel. "Nonparametric Tests of Market Structure: An Application to the Cigarette Industry." Journal of Industrial Economics, 1987, 35(4), pp. 483-98.
Barzel, Yoram. "An Alternative Approach to the Analysis of Taxation." Journal of Political Economy, 1976, 84(6), pp. 1177-97.
Becker, Gary S. and Murphy, Kevin M. "A Theory of Rational Addiction." Journal of Political Economy, 1988, 96(4), pp. 675-700.
Becker, Gary S., Grossman, Michael and Murphy, Kevin M. "An Empirical Analysis of Cigarette Addiction." American Economic Review, 1994, 84(3), pp. 396-418.
Becker, Gary S., Grossman, Michael and Murphy, Kevin M. "An Empirical Analysis of Cigarette Addiction." NBER Working Paper No. 3322. 1990.
Berry, Steven. "Estimating Discrete-Choice Models of Product Differentiation." Rand Journal of Economics, 1994, 25(2), pp. 242-62.
The B.E. Journal of Economic Analysis & Policy, Vol. 10 , Iss. 1 (Frontiers), Art. 63 http://www.bepress.com/bejeap/vol10/iss1/art63
Berry, Steven, Levinsohn, James and Pakes, Ariel. "Automobile Prices in Market Equilibrium." Econometrica, 1995, 63(4), pp. 841-90.
Bresnahan, Timothy F. "Competition and Collusion in the American Automobile Industry: The 1955 Price War." Journal of Industrial Economics, 1987, 35(4), pp. 457-82.
Bound, John, Jaeger, David A. and Baker, Regina M. “Problems with Instrumental Variables Estimation when the Correlation between the Instrument and the Endogenous Explanatory Variable is Weak.” Journal of the American Statistical Association, 1995, 90(430), pp.443-450.
Bulow, Jeremy and Klemperer, Paul. "The Tobacco Deal." Brookings Papers on Economic Activity. Microeconomics, 1998, pp. 323-94.
Chaloupka, Frank J. "Rational Addictive Behavior and Cigarette Smoking." Journal of Political Economy, 1991, 99(4), pp. 722-42.
Chaloupka, Frank J. and Warner, K.E. "The Economics of Smoking." A. J. Culyer and J. P. Newhouse, Handbook of Health Economics. Amsterdam: Elsevier: North Holland, 2000, 1539-627.
Chevalier, Judith A., Kashyap, Anil K. and Rossi, Peter E. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data." American Economic Review, 2003, 93(1), pp. 15-38.
Coppejans, Mark, Gilleskie, Donna, Sieg, Holger and Strumpf, Koleman S. "Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes." Review of Economics and Statistics, 2007, 89(3), pp. 37-65. Council of State Governments. "Tobacco Settlement and Declining State Revenues," 2002.
Cutler, David M., Gruber, Jonathan, Hartman, Raymond S., Landrum, Mary Beth, Newhouse, Joseph P. and Rosenthal, Meredith B. "The Economic Impacts of the Tobacco Settlement." Journal of Policy Analysis and Management, 2002, 21(1), pp. 1-19.
Evans, William N. and Farrelly, Matthew C. "The Compensating Behavior of Smokers: Taxes, Tar, and Nicotine." Rand Journal of Economics, 1998, 29(3), pp. 578-95. 41
Ciliberto and Kuminoff: Cigarette Industry Competition Before and After the MSA Published by The Berkeley Electronic Press, 2010
Farrelly, Matthew C., Nimsch, C.T., Hyland, A. and Cummings, M. "The Effects of Higher Cigarette Prices on Tar and Nicotine Consumption in a Cohort of Adult Smokers." Health Economics, 2004, 13(1), pp. 49-58.
Gale, Frederick, Foreman, Linda and Capehart, Thomas. "Tobacco and the Economy: Farms, Jobs, and Communities." U.S.D.A. Economic Research Service, Agricultural Economic Report No. 789. 2000, 44.
Gowrisankaran, Gautam and Rysman, Marc. “Dynamics of Consumer Demand for New Durable Goods.” Mimeo, 2009.
Gruber, Jonathan and Kőszegi, Botond. "Is Addiction "Rational"? Theory and Evidence." Quarterly Journal of Economics, 2001, 116(4), pp. 1261-303.
Gul, Faruk and Pesendorder, Wolfgang. “Harmful Addiction.” Review of Economic Studies, 2007, 74(1), pp.147-172. Hanemann, W. Michael. "Discrete/Continuous Models of Consumer Demand." Econometrica, 1984, 52(3), pp. 541-61. Hendel, Igal. “Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns.”Review of Economic Studies, April 1999, pp. 423-446. Hendel, Igal and Nevo, Aviv. "Measuring the Implications of Sales and Consumer Inventory Behavior." Econometrica, 2006, 74(6), pp. 1637-73. Isaccson, Bruce and Silk, Alvin. Philip Morris: Marlboro Friday (a), Case 9-596- 001. Cambridge, MA: Harvard Business School, 1997. Judd, Kenneth L. 1998. Numerical Methods in Economics. Cambridge: The MIT Press. Nevo, Aviv. "Measuring Market Power in the Ready-to-Eat Cereal Industry." Econometrica, 2001, 69(2), pp. 307-42. Ohls, James C., Ponza, Michael, Moreno, Lorenzo, Zambrowski, Amy and Cohen, Rhoda. "Food Stamp Participants' Access to Food Retailers. Mathematical Policy Research Inc. Report Submitted to U.S.D.A. Food and Nutrition Service, Office of Analysis and Evaluation." 1999. 42 The B.E. Journal of Economic Analysis & Policy, Vol. 10 , Iss. 1 (Frontiers), Art. 63 http://www.bepress.com/bejeap/vol10/iss1/art63 Petrin, Amil. "Quantifying the Benefits of New Products: The Case of the Minivan." Journal of Political Economy, 2002, 110(4), pp. 705-29. Porter, Robert H. "The Impact of Government Policy on the U.S. Cigarette Industry." P. Ippolito and D. Scheffman, Empirical Approaches to Consumer Protection Economics. Washington: Federal Trade Commission, 1986, 447-81. Raper, Kellie Curry, Love, H. Alan and Shumway, C. Richard. "Distinguishing the Source of Market Power." American Journal of Agricultural Economics, 2007, 89(1), pp. 78-90. Roberts, Mark J. and Samuelson, Larry. 1988. "An Empirical Analysis of Dynamic, Nonprice Competition in an Oligopolistic Industry." Rand Journal of Economics, 19(2), pp. 200-20. Showalter, Mark H. "Firm Behavior in a Market with Addiction: The Case of Cigarettes." Journal of Health Economics, 1999, 18(4), pp. 409-27. Sloan, Frank A., Smith, V. Kerry and Taylor, Donald H. 2003. The Smoking Puzzle: Information, Risk Perception, and Choice. Cambridge: Harvard University Press. Sobel, Russell S. and Garrett, Thomas A. "Taxation and Product Quality: New Evidence from Generic Cigarettes." Journal of Political Economy, 1997, 105(4), pp. 880-87. Staiger, Douglas and Stock, James H. "Instrumental Variables Regression with Weak Instruments." Econometrica, 1997, 65(3), pp. 557-86. Sumner, Daniel A. "Measurement of Monopoly Behavior: An Application to the Cigarette Industry." Journal of Political Economy, 1981, 89(5), pp. 1010- 19. Sullivan, Daniel. "Testing Hypotheses About Firm Behavior in the Cigarette Industry." Journal of Political Economy, 1985, 93(3), pp. 586-98. Tan, Wei. 2004. "A Dynamic Analysis of the U.S. Cigarette Market and Anti- Smoking Policies." Mimeo. 43 Ciliberto and Kuminoff: Cigarette Industry Competition Before and After the MSA Published by The Berkeley Electronic Press, 2010 Tan, Wei. 2006. "The Effects of Taxes and Advertising Restrictions on the Market Structure of the U.S. Cigarette Market." Review of Industrial Organization, 28(3), pp. 199-326. United States Federal Trade Commission. Competition and the Financial Impact of the Proposed Tobacco Industry Settlement. 1997. United States Federal Trade Commission. 'Tar', Nicotine, and Carbon Monoxide of the Smoke of 1294 Varieties of Domestic Cigarettes for the Year 1998. 2000. United States Federal Trade Commission. Federal Trade Commission Cigarette Report for 2004 and 2005. 2007.