A Dynamic Analysis of the U.S. Cigarette Market and Anti-Smoking Policies

47 Pages Posted: 1 Nov 2004

See all articles by Wei Tan

Wei Tan

SUNY at Stony Brook University, College of Arts and Science, Department of Economics

Date Written: November 1, 2004

Abstract

An empirical dynamic oligopoly model of the cigarette industry is developed to study the responses of firms to various anti-smoking policies and to estimate the implications for the policy efficacy. Firms are modeled as coordinating in price and competing in advertising in a dynamic game. The dynamic model captures two crucial features of the cigarette industry: 1) dynamic demand due to addiction and 2) differences between young smokers and adult smokers in their responses to price and advertising. The structural parameters are estimated using a combination of micro and macro level data and firms' optimal price and advertising strategies are solved as a Markov Perfect Nash Equilibrium. I find that the estimated dynamic model predicts industry prices and advertising expenditures extremely well. Moreover, the simulation results show that increasing the tobacco tax reduces both the overall smoking rate and the youth smoking rate, while advertising restrictions may back fire and actually increase the youth smoking rate. Furthermore, the long run effects of anti-smoking policies on reducing smoking rates tend to be smaller than the short run effects, as firms have stronger incentives to exploit current smokers over the short run.

Keywords: Dynamic oligopoly, smoking, anti-smoking policies

JEL Classification: L1, I1

Suggested Citation

Tan, Wei, A Dynamic Analysis of the U.S. Cigarette Market and Anti-Smoking Policies (November 1, 2004). Available at SSRN: https://ssrn.com/abstract=607764 or http://dx.doi.org/10.2139/ssrn.607764

Wei Tan (Contact Author)

SUNY at Stony Brook University, College of Arts and Science, Department of Economics ( email )

Stony Brook, NY 11794
United States

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