A Dynamic Model of Rational Addiction: Evaluating Cigarette Taxes

Brett Gordon () and Baohong Sun ()
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Baohong Sun: Cheung Kong Graduate School of Business, New York, New York 10022

Marketing Science, 2015, vol. 34, issue 3, 452-470

Abstract: Addiction creates an intertemporal link between a consumer’s past and present decisions, altering their responsiveness to price changes relative to nonaddictive products. We construct a dynamic model of rational addiction and endogenous consumption to investigate how consumers respond to policy interventions that aim to reduce purchases of cigarettes. We find that, on average, the category elasticity is about 35% higher when the model correctly accounts for addiction. However, some policies spur substitution from more expensive single packs to less expensive cartons of cigarettes, resulting in higher overall consumption for some consumers.

Keywords: rational addiction; cigarettes; addictive goods; endogenous consumption; state dependence (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:34:y:2015:i:3:p:452-470

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