OLIGOPOLY STRUCTURE AND THE INCIDENCE OF CIGARETTE EXCISE TAXES

A model of oligopoly price behavior and tax incidence for the U.S. cigarette industry for the period 1955-1990 is presented. A cost function is estimated, and shows manufacture to be subject to increasing returns to scale. The mean price elasticity of demand is -0.71. The model indicates that competition among manufacturers has been decreasing since 1980. A simulation shows that an increase in the federal excise tax causes a greater increase in price, and a greater decrease in consumption, than does the same increase in the average of state and local tax rates.