nep-dcm New Economics Papers
on Discrete Choice Models
Issue of 2010‒09‒18
one paper chosen by
Philip Yu
Hong Kong University

  1. Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry By Ciliberto, Federico; Kuminoff, Nicolai

  1. By: Ciliberto, Federico; Kuminoff, Nicolai
    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.
    JEL: L13 L41 H32
    Date: 2010–07–17

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