Has a quarter-trillion-dollar settlement helped the tobacco industry? |
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Authors: | Fowler Stuart J Ford William F |
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Institution: | (1) Economics and Finance Department, Middle Tennessee State University, P.O. Box 27, 37132 Murfreesboro, TN |
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Abstract: | This paper builds on a growing body of literature analyzing the economic effects of the so-called Master Settlement Agreement
(MSA) between the “big four” tobacco companies and the State Attorneys General. Because the marginal cost imposed by the settlement
is a function of the market sales of the original four participants, subsequent participating firms will most likely be at
a disadvantage. Consistent with increased market power for the original signers, the data since the settlement show increased
price overshifting of taxes. Additionally, price undershifting is shown to have occurred prior to the MSA, which would be
a rational response of a firm facing a settlement that imposes marginal costs inversely related to sales volume at the time
of the agreement. These results suggest that efficiency evaluations may overstate the social benefits of the agreement and
the persistent profitability of the industry may be due to the MSA. |
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