| 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 |
| URL: |
http://d.repec.org/n?u=RePEc:pra:mprapa:24883&r=dcm |