A dynamic model of rational addiction: Evaluating cigarette taxes

Brett R. Gordon, Baohong Sun

Research output: Contribution to journalArticle

9 Scopus citations

Abstract

Addiction creates an intertemporal link between a consumer’s past and present decisions, altering their responsiveness to price changes relative to nonaddictive products. We construct a dynamic model of rational addiction and endogenous consumption to investigate how consumers respond to policy interventions that aim to reduce purchases of cigarettes. We find that, on average, the category elasticity is about 35% higher when the model correctly accounts for addiction. However, some policies spur substitution from more expensive single packs to less expensive cartons of cigarettes, resulting in higher overall consumption for some consumers.

Original languageEnglish (US)
Pages (from-to)452-470
Number of pages19
JournalMarketing Science
Volume34
Issue number3
DOIs
StatePublished - Jan 1 2015

Keywords

  • Addictive goods
  • Cigarettes
  • Endogenous consumption
  • Rational addiction
  • State dependence

ASJC Scopus subject areas

  • Business and International Management
  • Marketing

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