Review of Industrial Organization (2006) 28:231–251 © Springer 2006
The Effects of Taxes and Advertising
Restrictions on the Market Structure
of the U.S. Cigarette Market
Department of Economics, State University of New York at Stony Brook, Stony Brook,
NY 11794, USA. E-mail: firstname.lastname@example.org
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 com-
monly 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.
Key words: Dynamic oligopoly, market structure, cigarette industry.
JEL Classiﬁcations: L1, L51, L66, M37.
Over the last decades, numerous anti-smoking policies with signiﬁcant eco-
nomic impacts – for example, tax increases and advertising restrictions –
have been implemented in order to reduce the overall smoking rate. These
anti-smoking policies have caused signiﬁcant changes in the market struc-
ture of the U.S. cigarette industry. First, the overall concentration of the
market has increased both at the ﬁrm level and at the brand level. Table I
tabulates the market share of major tobacco ﬁrms from 1990 to 2000;
Table II shows changes in the market shares of top brands during the
same period. As shown in the two tables, Philip Morris, the leading ﬁrm in
the industry, has steadily increased its market share from 42.2% to 50.5%,
while the market share of the leading brand, Marlboro, increased from 26%
to 37.7%. Measured by the ﬁrm level Hirﬁndahl Hirschman Index (HHI),
the concentration level increased from 2,880 in 1990 to 3,317 in 2000.