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.
Original language | English (US) |
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Article number | 63 |
Journal | B.E. Journal of Economic Analysis and Policy |
Volume | 10 |
Issue number | 1 |
DOIs | |
State | Published - 2010 |
Keywords
- Master Settlement Agreement
- cigarettes
- competition
- demand
- discrete choice
ASJC Scopus subject areas
- Economics and Econometrics
- Economics, Econometrics and Finance (miscellaneous)