Review of Industrial Organization (2006) 28:201–229 © Springer 2006
The Effect of Government Advertising Policies
on the Market Power of Cigarette Firms
SHILPI BIHARI and BARRY J. SELDON
School of Social Sciences-GR 31, The University of Texas at Dallas, Richardson, TX
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 advertis-
ing ban decreased market power.
Key words: Advertising policies, broadcast advertising ban, cigarettes, market power.
JEL Classiﬁcations: L1, L51, L66, M37.
Among industries in the United States, the cigarette industry has had a
rather unique history of government interventions ranging from antitrust
suits to government health warnings and restrictions on advertising due
to the addictive nature of nicotine coupled with the deleterious effects of
smoking upon health. Early in the 20th century, the government initiated
antitrust litigation following more than 20 years of monopolization. James
B. Duke had established the country’s largest cigarette manufacturing ﬁrm
in the 1880s through aggressive investment and advertising and used this
position to establish the American Tobacco Company in 1890, a merger of
the ﬁve largest cigarette manufacturers at the time, which controlled 90%
of the domestic market. In 1911, as a result of a Supreme Court deci-
sion that American Tobacco had monopolized the market in violation of
the Sherman Antitrust Act, the company was divided into four: American
Tobacco, Liggett & Myers, P. Lorillard, and R.J. Reynolds.
Author for correspondence. E-mail: firstname.lastname@example.org
For histories of the US cigarette market see Jaffe (2000) and Fritscher and Hoeﬂer