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

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)

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.

• Item Type: MPRA Paper
• Language: English
• 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

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