Firm behavior in a market with addiction: the case of cigarettes

This paper investigates firm behavior when demand is linked over time. Among other things, the theoretical section shows that if firms are forward-looking, anticipated future events can affect current consumption of an 'addictive' good even when consumers are completely myopic. The empirical part of the paper reports a simulation of the 1983 federal cigarette excise tax increase. Both myopic and rational models of consumer demand give roughly the same predictions for per capita consumption, but neither model does very well predicting actual consumption. The problem appears to lie in the prediction of price, suggesting that supply considerations are important.