Advertising Restrictions and Cigarette Smoking: Evidence from Myopic and Rational Addiction Models

By Iwasaki, Natsuko; Tremblay, Carol Horton et al. | Contemporary Economic Policy, July 2006 | Go to article overview

Advertising Restrictions and Cigarette Smoking: Evidence from Myopic and Rational Addiction Models


Iwasaki, Natsuko, Tremblay, Carol Horton, Tremblay, Victor J., Contemporary Economic Policy


I. INTRODUCTION

As the leading cause of preventable mortality in the United States, cigarette smoking imposes a tremendous cost on society. Sloan et al. (2004) estimate that each year smoking causes approximately 400,000 deaths and $104 billion in social costs. Of this amount, $35 billion is external to individual cigarette smokers. In spite of these known private and external costs associated with cigarette smoking, approximately 17% of U.S. adults continue to smoke cigarettes (Centers for Disease Control and Prevention 2002). (1)

To reduce cigarette smoking, many countries have imposed various advertising restrictions. For example, the United States enacted the Fairness Doctrine Act, effective 1968-70, which required that one antismoking advertisement be aired for every four prosmoking advertisements on television and radio. In 1971 the U.S. Broadcast Advertising Ban supplanted the Fairness Doctrine Act by abolishing all cigarette (pro- and antismoking) advertising from TV and radio. At the end of 1998, the U.S. tobacco industry and 46 states forged an agreement, the National Tobacco Settlement, that prohibits outdoor advertising, bans tobacco companies from using cartoon characters to market their products, and provides funding for antismoking advertising (Nader 1998; Shapiro 1998; Teinowitz 1998).

A growing body of evidence has shown, however, that advertising bans have no significant effect on cigarette demand. (2) For example, in a study of 22 Organisation for Economic Co-operation and Development countries, Stewart (1993) finds that advertising bans may actually stimulate cigarette smoking. Schneider et al. (1981) find that the Broadcast Advertising Ban increased cigarette smoking in the United States, arguing that this was due to the elimination of both pro- and antismoking advertising. In a review article of international studies concerning the relationship between advertising and cigarette smoking, Duffy (1996, p. 20) concludes: "Taken as a whole, these studies, American and otherwise, provide very little support for those who believe that a broadcast advertising ban is a potent way of achieving significant changes in smoking behavior."

Given the high cost and the subsequent social goal of deterring smoking, understanding the consequences of advertising restrictions is critical to establishing appropriate public policy. Tremblay and Tremblay (1999) argue that the counterintuitive conclusion of Duffy (1996) and others may be incorrect because it ignores the supply side effects of advertising. Their model shows that even when advertising has no effect on market demand, an advertising ban can still cause a dramatic fall in the equilibrium level of cigarette smoking if advertising has procompetitive supply effects. Farr et al. (2001) find empirical support for this hypothesis in the short run using a myopic addiction model.

In contrast to previous work, the authors compare the short-run and long-run effects of advertising restrictions on cigarette smoking for both myopic and rational addiction models. In myopic addiction models consumers have no foresight, so previous consumption affects current consumption, but future consumption bears no influence. When consumers are rationally addicted (Becker and Murphy 1988), they also look forward so that current consumption may depend on expected future as well as past consumption. Although there has been empirical support for the rational addiction model (Chaloupka 1991; Becker et al. 1994; Olekalns and Bardsley 1996; Fenn et al. 2001; Sloan et al. 2002), it has not gone unchallenged. For example, Akerlof (1991) shows that procrastination can negate foresight. In Akerlof's model, consumers ignore the future because the present is unduly salient. A consumer who wants to quit smoking because of an increase in expected future prices, for example, may find it optimal to postpone quitting for a day, as the benefit of smoking now is high relative to the cost of waiting one day to quit. …

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