Regulating Advertisements: The Case of Smoking Cessation Products

In this paper we investigate how direct-to-consumer (DTC) advertising of pharmaceutical products in affected by regulations of the Food and Drug Administration and by market conditions. We focus on a relatively under-studied segment of the pharmaceutical market -- the market for smoking cessation products. Because of their proven effectiveness, these products could be the key to meeting public health goals to reduce smoking. However, in many ways, smoking cessation products have been more heavily regulated than cigarettes. Our empirical analysis uses data on advertising expenditures and data from an archive of print advertisements. The archive includes all smoking cessation product advertisements that appeared in over 13,000 issues of 28 magazines between January 1985 and May 2002. Our study period begins shortly atfer the first nicotine replacement product was introduced, and covers the evolution of the market as new products are introduced while some of the older products move from prescription to over-the-counter (OTC) status. OTC status eases the disclosure requirements imposed on advertisements of prescription pharmaceuticals, substantially reducing the costs of a print advertisement. Our results suggest that OTC status is associated with an increase in advertising expenditures and the number and pages of magazine advertisements. A current proposal to reduce disclosure requirements on all DTC advertisements of prescription drugs could have similar effects. Our results also suggest that advertising increase with the introduction of new products and with market competition.

Excise Tax Avoidance: The Case of State Cigarette Taxes

In this paper we contribute new empirical results about consumers’ decisions to avoid cigarette excise taxes, and a new applied welfare economic analysis of optimal excise taxation with tax avoidance. We examine direct measures of consumer excise tax avoidance in novel individual-level data from the 2003 and 2006 - 2007 Tobacco Use Supplements to the U.S. Current Population Survey. We estimate reduced-form models and a structural endogenous switching regression model. In the structural border-crossing equation, the decision to cross the border depends on the difference between the endogenous home- and border-state prices. The reduced-form and structural results show that the probability of cross-border cigarette purchases responds in predictable ways to the economic incentives created by the distance to the border and state tax differentials. To our knowledge, we are also the first study to extend the formula for optimal Pigouvian corrective taxation to incorporate excise tax avoidance. Taking into account tax avoidance implies the optimal tax is substantially below the simple Pigouvian tax that internalizes external costs. In illustrative calculations for 2003, we find that in 20 states the optimal tax that accounts for tax avoidance is at least 20 percent smaller than the simple Pigouvian tax.

Who Pays Cigarette Taxes? The Impact of Consumer Price Search

We conduct an empirical study of the impact of consumer price-search on the shifting of cigarette excise taxes to consumer prices. We use novel data on the prices smokers report actually paying for cigarettes. We document substantial price dispersion. We find that cigarette taxes are shifted at lower rates to the prices paid by consumers who undertake more price search – carton buyers, and especially, smokers who buy cartons of cigarettes in a state other than their state of residence. We also find suggestive evidence that taxes are shifted at slightly higher rates to the prices paid by non-daily smokers, less addicted smokers, and smokers of light cigarettes.

Youth Smoking, Cigarette Prices, and Anti-Smoking Sentiment

In this paper, we develop a new direct measure of state anti-smoking sentiment and merge it with micro data on youth smoking in 1992 and 2000. The empirical results from the cross-sectional models show two consistent patterns: after controlling for differences in state anti-smoking sentiment, the price of cigarettes has a weak and statistically insignificant influence on smoking participation; and state anti-smoking sentiment appears to be a potentially important influence on youth smoking participation. The cross-sectional results are corroborated by results from discrete time hazard models of smoking initiation that include state fixed effects. However, there is evidence of price-responsiveness in the conditional cigarette demand by youth and young adult smokers.

Taxation and market power

"We analyze the incidence and welfare effects of unit sales taxes in experimental monopoly and Bertrand markets. We find, in line with economic theory, that firms with no market power are able to shift a high share of a tax burden on to consumers, independent of whether buyers are automated or human players. In monopoly markets, a monopolist bears a large share of the burden of a tax increase. With human buyers, however, this share is smaller than with automated buyers as the presence of human buyers constrains the pricing behavior of a monopolist." (author's abstract)"Dieser Artikel untersucht Inzidenz- und Wohlfahrtseffekte einer Mengensteuer in experimentellen Monopol- und Bertrand-Märkten. Im Einklang mit der ökonomischen Theorie sind Firmen ohne Marktmacht in der Lage, einen großen Anteil der Last einer Steuererhöhung an die Konsumenten weiterzugeben. Dies gilt unabhängig davon, ob die Käufer simuliert sind oder die Kaufentscheidungen durch reale Käufer getroffen werden. In Monopolmärkten trägt der Monopolist einen großen Anteil der Last einer Steuererhöhung. Werden die Kaufentscheidungen durch reale Käufer getroffen, ist dieser Anteil jedoch kleiner als mit simulierten Käufern, da reale Käufer im Experiment das Preissetzungsverhalten des Monopolisten einschränken." (Autorenreferat