Question

Consider a Cournot duopoly of two identical cigarette producing firms, Warlboro and Cramel. They produce tobacco of same quality and, ceteris paribus, each firm sells to 1 million smokers, making $100 profits per smoker. These 2 million smokers are addicts (as most smokers are). They may change which tobacco they smoke but they do not quit. On the other hand, those who are not smokers will not start even if they are encouraged (because they understand the harm). In other words, the size of the market is fixed (the demand is extremely inelastic). Any of the two firms may try to win the customers away from the rival by advertising. If Warlboro spends $20 million on the ads while Cramel spends nothing, Warlboro wins additional half a million smokers, that is, Warlboro sells to 1.5 million while Cramel sells to 0.5 million. If Cramel spends $20 million on the ads while Warlboro spends nothing, Cramel wins additional half a million smokers, that is, Cramel sells to 1.5 million while Warlboro sells to 0.5 million. If both firms spend $20 million on the ads, their efforts cancel each the other and each firm sells to 1 million smokers. In every scenario, the profits per smoker remains $100 (not accounting for the ad spending).

Think about this game and explain, in your own words, why the tobacco producers may lobby the government to ban (make it illegal) advertising tobacco products.

( Please provide answers with easy words. up to 200 words )

Answer 1

ANSWER:

The table above is the pay-off matrix for the Cournot game described in the question. From the pay-off matrix we can deduce that both the players i.e. Warlboro and Caramel have Advertise as a dominant strategy. Thus there payoffs or profit are $80 million each. These payoffs are less than the payoff they could have earned had they chosen No Advertise. So if one chooses not to advertise the other player may advertise and earn larger market share. So they will lobby the government to ban advertising so as to earn higher profits.

		Warlboro
		Advertise	No Advertise
Caramel	Advertise	80, 80	130, 50
	No Advertise	50, 130	100, 100

the tobacco lobby engaged in a comprehensive and aggressive political effort in state legislatures to sell tobacco with the least hindrance using lobbying, the media, public relations, front groups, industry allies, and contributions to legislators. These efforts included campaigns to neutralise clean indoor air legislation, minimise tax increases, and preserve the industry's freedom to advertise and sell tobacco. The tobacco lobby succeeded in increasing the number of states that enacted state pre-emption of stricter local tobacco control laws and prevented the passage of many state tobacco control policies. Public health advocates were able to prevent pre-emption and other pro-tobacco policies from being enacted in several states.

The tobacco lobby is a powerful presence in state legislatures. Because of the poor public image of the tobacco lobby, it seeks to wield this power quietly and behind the scenes. State and local health advocates, who often have high public credibility, can use this fact against the tobacco lobby by focusing public attention on the tobacco lobby's political influence and policy goals and expose links between the tobacco lobby and its legislative supporters.

The industry's public policy objective has been to preserve and expand its customer base, sales, and profits through sophisticated lobbying and political efforts in state legislatures. Linked to this primary policy goal have been the ongoing identification and advancement of specific profit and sales enhancing goals such as the defeat of clean indoor air legislation, cigarette excise tax increases, and restrictions on marketing and promotion as well as enactment of tort and product liability reform legislation designed to reduce legal risks and litigation costs. The industry achieves this objective through a bundle of comprehensive insider lobbying approaches coordinated with registered contract tobacco lobbyists in each state through a collaborative and hierarchal relationship with company top management and Tobacco Institute lobbying officials.

The tobacco lobbyists' comprehensive approach to influencing state policy making has included direct campaign contributions, gifts, honoraria, and charitable contributions to legislators' pet programmes, indirect (or soft money) contributions to legislators' political caucuses and parties for non-campaign political education and technical assistance purposes, and providing group entertainment such as hunting trips or sporting events to “bond” with state legislators in order to build mutual political trust and support It has also included building political support with and through allied and front groups such as smokers' rights groups, restaurant, bar, hotel, and motel associations, and funding “special projects” designed to secretly undermine state tobacco control policy, such as legislatively opposing educational anti-tobacco ASSIST (American stop smoking intervention study) programme efforts in Washington.

These policy objectives and approaches have led to and are also connected to collective state legislative outputs or governmental actions relating to tobacco control legislation and programmes, including enactment of state laws preempting local clean indoor air and other tobacco control ordinances and keeping state tobacco excise taxes low.