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The Effect of Government Advertising Policies on the Market Power of Cigarette Firms

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  • Shilpi Bihari
  • Barry Seldon

Abstract

We estimate market power among cigarette manufacturers over 1952–1984, a period of uniform pricing. We apply the Bresnahan approach; adjust it to the firm level; employ a dynamic model with habit persistence; and add an advertising equation, which helps identify the parameters, increase degrees of freedom, and constrain parameters so we can interpret our results at the firm level, despite the fact that the equations conform to what we might see in a market model. We consider effects of government interventions upon demand and market power and find, for instance, that the 1971 broadcast advertising ban decreased market power. Copyright Springer 2006

Suggested Citation

  • Shilpi Bihari & Barry Seldon, 2006. "The Effect of Government Advertising Policies on the Market Power of Cigarette Firms," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 28(3), pages 201-229, May.
    • Handle: RePEc:kap:revind:v:28:y:2006:i:3:p:201-229
    DOI: 10.1007/s11151-006-0019-3
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    References listed on IDEAS

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    1. Baltagi, Badi H & Levin, Dan, 1986. "Estimating Dynamic Demand for Cigarettes Using Panel Data: The Effects of Bootlegging, Taxation and Advertising Reconsidered," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 148-155, February.
    2. Steen, Frode & Salvanes, Kjell G., 1999. "Testing for market power using a dynamic oligopoly model," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 147-177, February.
    3. Rossitza B. Wooster & Craig A. Gallet, 2005. "Settling the Smoke: Public Policy and Shareholder Wealth in the Cigarette Industry," Contemporary Economic Policy, Western Economic Association International, vol. 23(2), pages 211-223, April.
    4. Sullivan, Daniel, 1985. "Testing Hypotheses about Firm Behavior in the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 586-598, June.
    5. Gasmi, F & Laffont, J J & Vuong, Q, 1992. "Econometric Analysis of Collusive Behavior in a Soft-Drink Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 277-311, Summer.
    6. Chow, Gregory C., 1997. "Dynamic Economics: Optimization by the Lagrange Method," OUP Catalogue, Oxford University Press, number 9780195101928.
    7. Pindyck, Robert S, 1985. "The Measurement of Monopoly Power in Dynamic Markets," Journal of Law and Economics, University of Chicago Press, vol. 28(1), pages 193-222, April.
    8. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
    9. Bresnahan, Timothy F., 1982. "The oligopoly solution concept is identified," Economics Letters, Elsevier, vol. 10(1-2), pages 87-92.
    10. Craig A. Gallet, 1999. "The effect of the 1971 advertising ban on behavior in the cigarette industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(6), pages 299-303.
    11. Lamdin, Douglas J, 1999. "Event Studies of Regulation and New Results on the Effect of the Cigarette Advertising Ban," Journal of Regulatory Economics, Springer, vol. 16(2), pages 187-201, September.
    12. Sumner, Daniel A, 1981. "Measurement of Monopoly Behavior: An Application to the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 1010-1019, October.
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    Cited by:

    1. Maryam Mirza, 2019. "Advertising Restrictions and Market Concentration in the Cigarette Industry: A Cross-Country Analysis," IJERPH, MDPI, vol. 16(18), pages 1-17, September.
    2. Chin W. Yang & Hui Wen Cheng & Ching Wen Chi & Bwo-Nung Huang, 2016. "A Tax Can Increase Profit of a Monopolist or a Monopoly-like Firm: A Fiction or Distinct Possibility?," Hacienda Pública Española / Review of Public Economics, IEF, vol. 216(1), pages 39-60, March.
    3. Caroline Elliott & Yingqi Wei & Pamela Lenton, 2010. "The Effect Of Government Policy On Tobacco Advertising Strategies," Bulletin of Economic Research, Wiley Blackwell, vol. 62(3), pages 243-258, July.

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    More about this item

    Keywords

    Advertising policies; broadcast advertising ban; cigarettes; market power; JEL classification; L1; L51; L66; M37;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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