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Review of Industrial Organization

, Volume 28, Issue 3, pp 231–251 | Cite as

The Effects of Taxes and Advertising Restrictions on the Market Structure of the U.S. Cigarette Market

Article

Abstract

A dynamic oligopoly model of the cigarette industry is developed to study the effects of anti-smoking policies on the market structure of the U.S. cigarette industry. Firms are modeled as competing in price and advertising in a dynamic game. Two commonly used anti-smoking policies – advertising restrictions and tobacco tax increases – are evaluated using calibrated parameters. The simulation results show that in the long run both advertising restrictions and tax increases can successfully reduce the smoking rate. However, advertising restrictions reduce the smoking rate mainly in an indirect way through their impact on the concentration of the market, while tax increases reduce the smoking rate directly and have little effect on the concentration of the market. In addition, in the short run, advertising restrictions have a much smaller effect on reducing the smoking rate than tax increases.

Keywords

Dynamic oligopoly market structure cigarette industry 

Keywords

JEL classification L1 L51 L66 M37 

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Copyright information

© Springer 2006

Authors and Affiliations

  1. 1.Department of EconomicsState University of New York at Stony BrookStony BrookUSA

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