Advertising and Demand for Addictive Goods: The Effects of E-Cigarette Advertising

Abstract

Although TV advertising for traditional cigarettes has been banned since 1971, advertising for electronic cigarettes remains unregulated. The effects of e-cigarette ads have been heavily debated, but empirical analysis of the market has been limited. Analyzing both individual and aggregate data, I present descriptive evidence showing that i) e-cigarette advertising reduces demand for traditional cigarettes and ii) individuals treat e-cigarettes and traditional cigarettes as substitutes. I then specify a structural model of demand for cigarettes that incorporates addiction and allows for heterogeneity across households. The model enables me to leverage the information content of both data-sets to identify variation in tastes across markets and the state dependence induced on choice by addiction. Using the demand model estimates, I evaluate the impact of a proposed ban on e-cigarette television advertising. I find that in the absence of e-cigarette advertising, demand for traditional cigarettes would increase, suggesting that a ban on e-cigarette advertising may have unintended consequences.

Keywords: Advertising, E-Cigarettes, Public Policy