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

The B.E. Journal of Economic Analysis & Policy: Vol. 10, No. 1, Frontiers, Article 63

46 Pages Posted: 21 Apr 2005 Last revised: 19 Jul 2010

See all articles by Federico Ciliberto

Federico Ciliberto

University of Virginia - Department of Economics; Centre for Economic Policy Research (CEPR)

Nicolai V. Kuminoff

North Carolina State University - Department of Economics

Date Written: July 6, 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.

Keywords: Cigarettes, Master Settlement Agreement, Demand, Collusion, Rational Addiction

JEL Classification: H32, L13, L41

Suggested Citation

Ciliberto, Federico and Kuminoff, Nicolai V., Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry (July 6, 2010). The B.E. Journal of Economic Analysis & Policy: Vol. 10, No. 1, Frontiers, Article 63, Available at SSRN: https://ssrn.com/abstract=703789

Federico Ciliberto (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nicolai V. Kuminoff

North Carolina State University - Department of Economics ( email )

Raleigh, NC 27695-8110
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
350
Abstract Views
1,990
rank
94,674
PlumX Metrics