Review of Industrial Organization 18: 147–160, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
The Welfare Effect of Advertising Restrictions in
the U.S. Cigarette Industry
STEPHEN J. FARR
, CAROL HORTON TREMBLAY
and VICTOR J.
Renaissance Holding Corporation;
Department of Economics, Oregon State University, Ballard
Extension Hall 303, Corvallis, OR 97331-3612, U.S.A.
Abstract. The welfare effect of advertising restrictions in the U.S. cigarette industry depends upon
the impact of advertising on consumer and producer surplus, the transfer to consumers for being
exposed to utility-reducing advertising, and smoking externalities. We estimate a demand equation
and a supply relation simultaneously and use the parameter estimates to generate predictions of
the impact of advertising restrictions on social welfare. Our results show that advertising restrictions
beneﬁt producers by limiting competition and generating higher industry proﬁts, and such restrictions
lower social welfare if the external cost of cigarette smoking is sufﬁciently low.
Key words: Advertising, cigarette industry, social welfare.
Cigarette smoking is the leading preventable cause of death in the United States.
In 1995, medical expenditures, indirect costs, and the value of lost productivity
due to smoking amounted to over 100 billion dollars.
The widely know health
risks and negative externalities associated with smoking have motivated a number
of public policies aimed at curtailing cigarette consumption and the consequent
Under the presumption that advertising raises demand, policymakers reasoned
that advertising restrictions would reduce demand and externalities, thereby in-
creasing social welfare. Consequently, several advertising regulations have been
instituted over the previous four decades. First, the Fairness Doctrine Act, effective
1968–70, required that one anti-smoking advertisement be aired for every four
pro-smoking advertisements on television and radio. In 1971, the U.S. Broadcast
Advertising Ban supplanted the Fairness Doctrine Act and abolished all cigarette
(pro- and anti-) advertising from television and radio. In his State of the Union
We would like to thank David Spencer and two anonymous referees for many helpful comments
and Mumtaj Ara and Lawrence Wong for assistance with data collection. The usual caveat applies.
See Viscusi (1995), Kluger (1996), and Chaloupka and Warner (2000) for a discussion of the
social costs of cigarette smoking.