Coupons and Advertising in Markets for Addictive Goods: Do Cigarette Manufacturers React to Known Future Tax Increases?

We develop and test a pricing model for a monopolist that sells an addictive good. The model illustrates the conditions under which a monopolist lowers the price he charges youth when a future tax is imposed. Using household survey data, we investigate whether individuals use “cents-off” coupons in a way consistent with the price discrimination implied by the model. We find evidence that all smokers, not just the young, are more likely to use coupons prior to a tax increase if they are exposed to more advertising. With our data we cannot test whether cigarette manufacturers selectively offer youth price discounts in other ways.