The Impact of Cigarette Advertising on Consumer Surplus, Profit, and Social Welfare

Abstract

This study estimates the effect of U.S. cigarette advertising on social welfare. Because economists hold different beliefs about the nature of advertising, the analysis uses three different empirical models to test the welfare implication of cigarette advertising. Each model employs estimates of a demand equation and a supply relation to calculate a single point estimate of the impact of advertising on profit, consumer surplus, and total surplus. Bootstrapping generates confidence intervals for each welfare estimate. The results indicate that the cigarette industry is not competitive and that advertising significantly increases market power. Further, advertising significantly reduces consumer surplus if it is either purely persuasive or purely informative but has no significant effect on total surplus. Copyright 1995 Western Economic Association International.

Smoking laws and their differential effects on restaurants, bars, and taverns

“…The impact of smoking laws on consumer and producer surplus could also be examined; see Becker and Murphy (1993) and Tremblay and Tremblay (1995).…”

Health information and cigarette consumption: supply and spatial considerations

“…Furthermore, because using a system-estimator runs the risk of spreading specification error across all of the equations in the model (see Kennedy (2003)), we prefer a single-equation estimator to a system-estimator. Hence, we follow other studies of cigarette demand and supply (e.g., Kao and Tremblay (1988), Tremblay and Tremblay (1995), Farr et al (2001), and Gallet (2003)) by estimating the model using 2SLS.…”

“…As the severity of the health effects of smoking became more publicized, however, agreements were reached in the industry to redirect advertising away from claims about the health benefits of one brand over another. 4 Evidence of the impact of advertising on competition in the cigarette industry is mixed, as some studies (e.g., Mitchell and Mulherin (1988) and Eckard (1991)) support the pro-competitive view of cigarette advertising while others (e.g., Tremblay and Tremblay (1995), Farr et al (2001), and Gallet (2003)) support the anti-competitive view of cigarette advertising. Empirica (2006) 33:35-47 37 Beyond the prospect that health information may affect consumption by changing producer behavior, the existing literature is further limited by its penchant to use aggregate data.…”

“…For example, given the 1964 Surgeon General's Report is often considered a watershed event in the cigarette industry, numerous studies (see, for example, Hamilton (1972), Warner (1977), and Kao and Tremblay (1988)) find that the demand for cigarettes fell in the wake of the 1964 Report; whilst other studies have found significant structural change in cigarette demand resulting from the Fairness Doctrine of 1968-1970(e.g., Porter (1986 and Tremblay and Tremblay (1995)), the 1971 ban on TV and radio advertising of cigarettes (e.g., Schneider et al (1981) and Lewit et al (1981)), and the 1979 Surgeon General's Report (e.g., Fenn et al (2001)). …”

The Role of Advertising on Attitudes and Consumption of Food and Beverage Products

“…On the other hand, there are some studies that have found that advertising does have a positive effect on aggregate consumption for tobacco products (Fujii, 1980 ;Witt & Pass, 1981 ;Young, 1983 ;Bishop & Yoo, 1985 ;Radfar, 1985 ;Lee fl ang & Reuijl, 1985 ;Abernethy & Teel, 1986 ;Porter, 1986 ;Chetwynd, Coope, Brodie & Wells, 1988 ;Kao & Tremblay, 1988 ;Harrison, Chetwynd & Brodie, 1989 ;Sheldon & Doroodian, 1989 ;Tegene, 1991 ;Smee, 1992 ;Valdes, 1993 ;Tremblay & Tremblay, 1995 ) .…”