Advertising, Habit Formation, and U.S. Tobacco Product Demand

Abstract

The U.S. tobacco market has experienced a shift toward noncigarette tobacco products. We examined the degree of habit formation and the role of advertising for cigarettes, little cigars/cigarillos, large cigars, e-cigarettes, and smokeless tobacco using market-level scanner data for convenience stores. Results based on a dynamic demand system show that while all tobacco products are habitual, e-cigarettes are the most habitual product. More choices of flavors, less restrictions of its use in public places, less documented harmful effects, and a higher upfront cost might explain the higher degree of habit formation for e-cigarettes. We also find that e-cigarettes did not substitute or complement cigarettes. The results imply that e-cigarettes may serve as a gateway to nicotine addiction but not necessarily to cigarette smoking. As to advertising, cigarette magazine advertising did not affect cigarette demand while e-cigarettes’ TV advertising increased e-cigarettes demand with positive spillover to cigarette demand. Such results may help explain e-cigarettes’ recent success in sales and imply that e-cigarette TV advertising might undermine the efforts to reduce cigarette smoking. Advertising was also found to affect the degree of habit formation for cigarettes, large cigars, and e-cigarettes.

Keywords: Advertising, cigar, cigarette, cigarillo, e-cigarette, electronic cigarette, electronic nicotine delivery system, habit formation, smokeless tobacco

JEL Classification: D12, I18, M37