Essays on the effect of government intervention on the conduct and performance of cigarette firms

This dissertation considers topics in the economics of advertising, highlighting the effect of government intervention on cigarette firms' conduct and performance. The first essay of this dissertation models the effects of government intervention on the goodwill and market power of a firm. The model takes into consideration the fact that consumption of cigarettes is a function of the government interventions as well as the goodwill of the rival firms. The results indicate that market power might be reduced because of government regulation if demand is more responsive to government interventions, but also that firms respond to regulation by increased advertising. In cases where demand is more responsive to government regulation, government should intervene continuously to deter the effects of the intensified advertising by the firms. In the second essay of this dissertation, we estimate market power among cigarette manufacturers over 1952-1984, a period of uniform pricing. We apply the Bresnahan (1982) approach; use industry level data at the firm level; employ a dynamic model with habit persistence; and add an advertising equation, which helps identify the parameters, increase degrees of freedom, and constrain parameters so we can interpret our results at the firm level. We consider effects of government interventions upon demand and market power and find, for instance, that the 1971 broadcast advertising ban decreased market power. In the third essay we use the same approach as in the previous essay using firm level data for a particular firm, Philip Morris. We explore the estimation of market power, advertising conjectures, and coefficients of rival's response to Philip Morris' advertising and price. Although the estimation results are not conclusive, we are able to suggest several sources of difficulty in such estimation, which could assist in further endeavors of this kind.