Review of Industrial Organization (2006) 28:253–284 © Springer 2006
The Role of Retail Prices and Promotions
in Determining Cigarette Brand Market Shares
JOHN A. TAURAS
, RICHARD M. PECK
and FRANK J.
Department of Economics (m/c 144), University of Illinois at Chicago, 601 South
Morgan St., Room 2103, Chicago, IL 60607-7121, USA
Health Economics Program, National Bureau of Economic Research
Abstract. Over the past two decades, two forms of price competition have emerged within
the cigarette industry: the introduction and spread of discount and deep discount ciga-
rettes and the increased use of price-related promotions. In this paper, we use quarterly
market-level, scanner-based data on cigarette prices, promotions, and sales for 50 US mar-
kets over the period from 1994-IV through 2002-II to examine the impact of price and
promotions on market shares for premium, discount, and deep discount brand cigarettes.
Our estimates indicate that changes in relative prices, including those resulting from pro-
motions, account for much of observed changes in market shares.
Key words: brand choice, cigarettes, master settlement agreement, premium, discount and
deep discount brands, price and promotion.
JEL Classiﬁcations: L1, L66, M30.
The US cigarette industry has always had distinctive features that have
perennially intrigued industrial organization economists. From the 1950s
through the early 1990s, six companies dominated the cigarette market,
controlling over 99% of the market – R. J. Reynolds, Philip Morris, Brown
and Williamson, American Tobacco, Ligget and Lorrilard. Over the past
15 years, there has been some consolidation among the top ﬁrms, with
Brown & Williamson acquiring American Tobacco in the early 1990s and
the merger of Brown & Williamson with R.J. Reynolds that was com-
pleted in 2004. For most of the 20th century, the industry is best described
as a product differentiated oligopoly with a small number of major ﬁrms
accounting for nearly all output.
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