Advertising and Demand for Addictive Goods: The Effects of E-Cigarette Advertising

Although TV advertising for traditional cigarettes has been banned since 1971, advertising for e-cigarettes remains unregulated. The effects of e-cigarette ads have been heavily debated, but empirical analysis of the market has been limited. Analyzing both individual and aggregate data, I present descriptive evidence showing that e-cigarette advertising reduces demand for traditional cigarettes and that individuals treat e-cigarettes and traditional cigarettes as substitutes. I then specify a structural model of demand for cigarettes that incorporates addiction and allows for heterogeneity across households. The model enables me to leverage the information content of both data sets to identify variation in tastes across markets and the state dependence induced on choice by addiction. Using the demand model estimates, I evaluate the impact of a proposed ban on e-cigarette television advertising. I find that in the absence of e-cigarette advertising, demand for traditional cigarettes would increase, suggesting that a ban on e-cigarette advertising may have unintended consequences.