Coupons and Advertising in Markets for Addictive Goods: Do Cigarette Manufacturers React to Known Future Tax Increases?

Abstract

We develop and test a pricing model for a monopolist that sells an addictive good. The model illustrates the conditions under which a monopolist lowers the price he charges youth when a future tax is imposed. Using household survey data, we investigate whether individuals use “cents-off” coupons in a way consistent with the price discrimination implied by the model. We find evidence that all smokers, not just the young, are more likely to use coupons prior to a tax increase if they are exposed to more advertising. With our data we cannot test whether cigarette manufacturers selectively offer youth price discounts in other ways.

Citation

Lillard, D.R. and Sfekas, A. (2005), "Coupons and Advertising in Markets for Addictive Goods: Do Cigarette Manufacturers React to Known Future Tax Increases?", Lindgren, B. and Grossman, M. (Ed.) Substance Use: Individual Behaviour, Social Interactions, Markets and Politics (Advances in Health Economics and Health Services Research, Vol. 16), Emerald Group Publishing Limited, Leeds, pp. 313-327. https://doi.org/10.1016/S0731-2199(05)16015-4