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Has a quarter-trillion-dollar settlement helped the tobacco industry?

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  • Stuart Fowler
  • William Ford

Abstract

This paper builds on a growing body of literature analyzing the economic effects of the so-called Master Settlement Agreement (MSA) between the “big four” tobacco companies and the State Attorneys General. Because the marginal cost imposed by the settlement is a function of the market sales of the original four participants, subsequent participating firms will most likely be at a disadvantage. Consistent with increased market power for the original signers, the data since the settlement show increased price overshifting of taxes. Additionally, price undershifting is shown to have occurred prior to the MSA, which would be a rational response of a firm facing a settlement that imposes marginal costs inversely related to sales volume at the time of the agreement. These results suggest that efficiency evaluations may overstate the social benefits of the agreement and the persistent profitability of the industry may be due to the MSA. Copyright Academy of Economics and Finance 2004

Suggested Citation

  • Stuart Fowler & William Ford, 2004. "Has a quarter-trillion-dollar settlement helped the tobacco industry?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 28(3), pages 430-444, September.
    • Handle: RePEc:spr:jecfin:v:28:y:2004:i:3:p:430-444
    DOI: 10.1007/BF02751745
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    References listed on IDEAS

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    1. David M. Cutler & Jonathan Gruber & Raymond S. Hartman & Mary Beth Landrum & Joseph P. Newhouse & Meredith B. Rosenthal, 2002. "The Economic impacts of the tobacco settlement," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 21(1), pages 1-19.
    2. Jonathan Gruber, 2001. "Tobacco at the Crossroads: The Past and Future of Smoking Regulation in the United States," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 193-212, Spring.
    3. Johnson, Terry R, 1978. "Additional Evidence on the Effects of Alternative Taxes on Cigarette Prices," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 325-328, April.
    4. Ashenfelter, Orley & Sullivan, Daniel, 1987. "Nonparametric Tests of Market Structure: An Application to the Cigarette Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 483-498, June.
    5. Barzel, Yoram, 1976. "An Alternative Approach to the Analysis of Taxation," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1177-1197, December.
    6. 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.
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    Cited by:

    1. Goel, Rajeev K. & Nelson, Michael A., 2007. "The Master Settlement Agreement and cigarette tax policy," Journal of Policy Modeling, Elsevier, vol. 29(3), pages 431-438.

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