Description:

Francisco Pareschi (Northwestern):

Title: Reducing Consumer Inertia in Tobacco Markets

We study how industry structure influences the effect of tobacco control policies. Despite decades-long efforts to discourage smoking, the tobacco industry remains resilient. One of the main reasons is consumers' attachment to the products they smoke, which we call consumer inertia. We explore two reasons consumers are inert: they get addicted to nicotine and develop lasting brand loyalty to their products. Recently, regulators have proposed policies that would eliminate the addictive components of cigarettes and make consumers less loyal to their brands. Although such policies would directly impact consumers, we must understand firms' responses to assess the programs' overall impact on consumption. Inert consumers introduce dynamic incentives for the firms since future customers' choices depend on which product they patronize today. As a result, consumers become a valuable asset for the firm; capturing new customers is more costly, and exploiting existing ones is more attractive, significantly affecting how firms price, introduce, and discontinue products. To assess the empirical effect of reducing inertia in tobacco markets, we develop a model that accounts for consumers and firm responses: consumers have addiction and loyalty, and firms choose prices and product portfolios. We estimate the model leveraging rich variation from the Uruguayan industry and solve the equilibrium of the dynamic game for multiple levels of inertia. Our results indicate that industry responses can attenuate and even revert the positive impact of reducing inertia on smoking rates due to lower prices and more product availability. However, if the long-term profits generated by a person with tobacco addiction diminish enough, firms lower their investment in attracting new customers, which reinforces the direct effect policies have on consumers. These policies can be used together with taxation to reduce consumption without increasing the burden on tobacco consumers as much.