The impact of advertising regulation on industry: the cigarette advertising ban of 1971

Authors


  • I am indebted to Tom Holmes for his continuous encouragement and support. I am very grateful to Lanier Benkard, Erzo Luttmer, and Jim Schmitz for their invaluable comments. I am grateful to the editor, Ali Hortaçsu, and two anonymous referees for comments and suggestions that have substantially improved the article. I also benefited from discussions with Daphne Chen, Don Schlagenhauf, participants of the Applied Micro Workshop at University of Minnesota, and participants of the Quant Workshop at Florida State University. This article has also benefited from presentations at SED 2011 (Ghent, Belgium) and SICS 2009 (Berkeley, CA). All errors are mine.

Abstract

This article studies the impact of the 1971 TV/radio advertising ban on the cigarette industry. Data indicate that industry advertising spending decreased sharply immediately following the ban but recovered and actually exceeded the preban level within five years. A dynamic oligopoly model of advertising is developed to incorporate two potential explanations. The estimated model fully accounts for the puzzling trend, with 74% of the postban advertising spending increase explained by industry dynamics, and 26% explained by learning. Furthermore, this article uses the new concept of nonstationary oblivious equilibrium to handle intractable state space and accelerate equilibrium computation.

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