Advertising and Restrictions in the Cigarette Industry: Evidence of State-by-State Variation

I. INTRODUCTION Understanding the role of advertising in the cigarette industry has attracted a great deal of attention among academics, policy makers, and the public at large. Indeed, the belief that advertising promotes smoking is the basis for government efforts to reduce cigarette consumption via regulations on advertising. For example, in the United States the Fairness Doctrine of 1968-70 required one antismoking advertisement to be aired on television and radio for every four prosmoking advertisements. This was subsequently followed by a ban on all TV and radio advertisements of cigarettes from 1971 onward. As a result of recent lawsuits and settlement agreements between various state attorney generals and cigarette producers, the advertising of cigarettes has been further limited in form (e.g., the elimination of advertisements on billboards and apparel) and content (e.g., the elimination of cartoon characters to promote cigarettes). Given that advertising restrictions are based on the belief that advertisements boost consumption, most studies have addressed the role of advertising in the cigarette industry by including advertising expenditures in the specification of national-level demand. Yet this has several shortcomings. First, by focusing on the demand side of the market, most studies fail to account for the link between advertising and producer behavior. In particular, if advertising impacts market power, then consumption may be indirectly affected by advertising via the availability of supply. Second, given that most studies estimate models with country-level data, provided there are variations in behavior across states, the use of country-level data will mask such variations. For instance, because some states are more aggressive in their antismoking efforts than others, coupled with evidence that cigarette producers price discriminate across states, it is reasonable to expect differences in demand and supply from one state to the next. Accordingly, a more complete picture of the role of advertising in the cigarette industry would account for such considerations. Taking a decidedly less aggregate perspective, therefore, this article estimates the relationship between cigarette demand, supply, and advertising, all at the state level. Briefly, not only do the results support variations in demand and supply across states, they also show that the impact of advertising varies across several regimes, which are defined in terms of advertising restrictions. The remainder of the article is organized as follows. In section II, limitations of the existing literature are discussed. This is followed in section III with the presentation of a model that accounts for state variation in consumer and producer behavior in the cigarette industry. Section IV presents the data and empirical results, and section V provides concluding comments. II. LIMITATIONS OF PREVIOUS WORK Previous work on the link between advertising, restrictions, and cigarette consumption has focused on the estimation of the national demand for cigarettes. For example, by incorporating cigarette advertising expenditures into the specification of national demand, many studies estimate a positive advertising elasticity (e.g., Bishop and Yoo, 1986; Kao and Tremblay, 1988; Seldon and Doroodian, 1989). Such results suggest that restrictions on advertising expenditures may be an effective means to reducing the incidence of smoking. However, other studies (e.g., Hamilton, 1972; Barnett et al., 1995) find no significant impact of advertising on national cigarette demand, so the applicability of restrictions remains in question. (1) As suggested by Tremblay and Okuyama (2001), one limitation of the demand literature is that it ignores the possibility that advertising may affect consumption via the nature of competition. For example, under the anticompetitive view of advertising, advertising may be used to secure brand loyalty by incumbents. …