Accessible Requires Authentication Published by De Gruyter July 18, 2010

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

Federico Ciliberto and Nicolai V Kuminoff

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.

Published Online: 2010-7-18

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