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

Federico Ciliberto () and Nicolai Kuminoff

MPRA Paper from University Library of Munich, Germany

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. (search for similar items in EconPapers)
JEL-codes: L13 L41 H32 (search for similar items in EconPapers)
Date: 2010-07-17
New Economics Papers: this item is included in nep-com, nep-dcm, nep-hea and nep-mic
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Journal Article: Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry (2010) Downloads
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