Reducing Consumer Inertia in Tobacco Markets
Paper joint with Gaston Lopez
Abstract:
We study the equilibrium effects of tobacco control policies. While tobacco regulation often targets consumers, understanding firms’ responses is essential for accurately evaluating the impact of these policies on consumption. We highlight that consumers’ dependence on cigarettes, which we refer to as consumer inertia, introduces dynamic incentives for firms. Thus, we develop a dynamic oligopoly model and estimate it using product-level data and a panel of smokers. Leveraging large tax fluctuations and a policy that forced approximately 40% of products out of the market, we show that consumers face significant addiction and brand loyalty. We use these estimated preferences to demonstrate the importance of considering firms’ dynamic incentives to explain their observed behavior. Lastly, we propose a tractable equilibrium notion to compute market outcomes. We use this framework to examine the counterfactual effect of uniform packaging restrictions and caps on nicotine concentration. We show that firms’ responses tend to reinforce the direct effect of these policies. Supply responses strengthen the direct effect because companies’ incentives to attract new consumers decrease, since retaining them in the future becomes harder. These dynamic incentives reverse firms’ short-term considerations. For example, firms can amplify the impact of uniform packaging even though demand elasticity increases by up to three times and the expected number of products expands by as much as 30%.