The Relationship Between The Price Elasticity Of Demand For Addictive Goods And Profit - An Empirical Study Of The U.S. Cigarette Market

• Main Authors: Su-Chen Yang, 楊淑珍
• Other Authors: Yao-Hsien Lee
• Format: Others
• Language: zh-TW
• Published: 2004
• Online Access: http://ndltd.ncl.edu.tw/handle/26251821111857914926

博士 === 中華大學 === 科技管理研究所 === 92 === This study reviews the empirical study of cigarette consumption of the U.S., while investigating, the demand for cigarettes is estimated in the previous literature by using either cross-section data or time series data. Without considering few specific problems, biased estimations may result in imprecise estimation of price elasticities. The primary aim of this paper is to obtain better estimates of the price elasticity of demand for cigarette by using a panel data approach. The common problems that are with cross-section data and time series data can be avoided with this approach to reduce co-linearity among the explanatory variables and to improve the efficiency of these estimates. The study presents a set of estimates for the U.S. cigarette market. We find the dynamic fixed estimator (DFE) is superior to pool mean group estimator and mean group estimator. Using DFE as the estimator, the short run price elasticity is -0.12 and the long run price elasticity is -0.72. We compare the estimated price elasticities with the optimal price elasticities, finding a gap between the two values. The current estimated price elasticity is very steady and well below the optimal price elasticity, this implies that firms can increase its price to make more revenues. In other words, so long as the price elasticity of the demand for cigarettes is inelastic, we would expect that firms will increase the price of cigarette and enjoy excess profits.