Oligopoly structure and the incidence of cigarette excise taxes

Listed in:

• Tobacco industry's tactics relating to tax
• Pricing strategies
• ... on tax revenue
• Impact of tobacco taxation

Abstract

A model of oligopoly price behavior and tax incidence for the U.S. cigarette industry for the period 1955–1990 is presented. A cost function is estimated, and shows manufacture to be subject to increasing returns to scale. The mean price elasticity of demand is −0.71. The model indicates that competition among manufacturers has been decreasing since 1980. A simulation shows that an increase in the federal excise tax causes a greater increase in price, and a greater decrease in consumption, than does the same increase in the average of state and local tax rates.