Reports are coming in that the FTC will make a decision on the Reynolds American (RAI) and Lorillard (LO) merger next week. A rumor is circulating that a Federal Trade Commission Staff member has recommended that the FTC block the merger with a lawsuit.
I have to imagine one of the concerns is an extremely consolidated market would harm consumers. Less competition could lead to collusion and higher cigarette prices. However, it’s been the goal of local and federal governments to get people to quit smoking. One of the best ways to get people to quit smoking is through higher prices as Kenneth Warner, an economist from the University of Michigan’s School of Public Health, explains in the Freakonomics Podcast “How to Make People Quit Smoking“.
WARNER: The effects of tax and price are more well studied than any other area of tobacco control. We have a lot of data about that.
DUBNER: Okay, so what do the data say?
WARNER: What we know is that if you increase the price by 10 percent you will decrease total cigarette consumption by 3 to 4 percent.[emphasis added]
Higher cigarette prices affects those who can barely afford them the most. Again, if cigarettes cost more than this could be the catalysts that gets them to quit smoking. Or in the case of teenagers who are very price sensitive to cigarette prices, it prevents them from becoming smokers.
So, today, a pack of cigarettes in New York City costs, on average, more than $11. It is probably not coincidental, therefore, that New York State has one of the lowest smoking rates in the country. And who does an $11 price tag hit the hardest? The smokers who are most “price sensitive” – like teenagers. Indeed, between 2000 and 2012, the smoking rate among high schoolers in New York State fell by 56 percent. So if you want to fight smoking, you can see why economists, at least, agree that raising the price will work.[emphasis added]
We have a dog in this fight and would like to see the merger go through. I’m sure the FTC has many concerns about a large merger like this. However, if the rationale to block the merger is to “protect the consumer” from higher prices then that rationale is misplaced. The consumer is better served by not smoking. Higher cigarette prices are one of the best tools to get people to stop smoking.
Listen to full podcast below.
Or read the transcript