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

Federico Ciliberto and Nicolai Kuminoff

The B.E. Journal of Economic Analysis & Policy, 2010, vol. 10, issue 1, 46

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; discrete choice; demand; competition (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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Working Paper: Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry (2010)
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DOI: 10.2202/1935-1682.2362

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