Consumer Heterogeneity in the US Cigarette Market

Abstract

This paper studies the heterogeneous effects of public policy on cigarette demand across different smoker types. I propose a structural model of demand for differentiated products that allows preferences to vary by demographic characteristics. I define consumers using a rich set of tobacco-related demographics that enables us to differentiate the effects on addicted and non-addicted individuals, among other dimensions. I estimate the model combining public surveys and scanner US data between 2001 and 2003. My paper is one of the few to document a positive and causal effect of advertising expenditure on smoking probabilities, especially among the young. Changes in prices have much stronger effects on adult-addicted individuals relative to changes in advertising. However, price restrictions also affect proportionately more young consumers. Policies that affect asymmetrically premium and discount brands will also have heterogeneous effects across addicted and non-addicted consumers. Finally, while income and age differences explain heterogeneous price responses across young and adults within a smoker type, different advertising responses are mostly driven by addiction differences.