Price Elasticity, Marlboro Friday and MSA

December 9, 2004 2:32 pm by Gene Borio

Mr. Webb began his cross of economist Dr. Frank Chaloupka by asking if he had any evidence of an intent on the part of any of the defendants to design its pricing strategy in order to increase underage smoking.

Mr. Webb reiterated this question in a number of forms throughout the morning, and Dr. Chaloupka reiterated his reply several times too: he had never made such an allegation; his testimony is that the defendants knew that pricing had an effect on underage smoking (lower prices increase it), and developed marketing strategies based on that knowledge. Those strategies then had the predictable effects. Intent, Dr. Chaloupka said, was for the Judge to decide. Under Mr. Webb’s questioning, Dr. Chaloupka said he had seen no explicit statements that the companies were developing their marketing and pricing strategies with a view to increasing underage smoking.

Mr. Webb introduced the infamous Marlboro Friday event–April 2, 1993–when Philip Morris reduced the price of Marlboro by 40% to counteract the challenge of discount brands, which by that time had captured 47% of the market and caused a 6-month-long decline in Marlboro’s market share. Mr. Webb characterized the event as strictly a competitive business decision which eventually rescued Marlboro and its share. Dr. Chaloupka said teen smoking also went up.

Mr. Webb didn’t deny a relationship, butr characterized the rise in teen smoking as s “collateral consequence” and asked if a company should base its business decisions on such a collateral consequence. He noted the percent of underage smokers is 2% of the market, and questioned whether a company should base its business decisions on 2% of the market or the 98%.

Mr. Webb also introduced the MSA as a powerful influence on the market, allowing the rise of the discount manufacturers, and resultant pressures to keep prices low.

Mr. Webb introduced a National Household Survey on Drug Abuse survey from 2001 that showed an overwhelming proportion of 12-17 year old smokers smoked Marlboro, Newport or Camel–all 3 premium brands.

Judge Kessler seemed to respond to this argument and asked Dr. Chaloupka,

I don’t understand how you can say teenage smokers (12-18) are so price sensitive when you have admitted that 87.4% are smoking the 3 most expensive brands on the market.

Dr. Chaloupka said he didn’t agree that they were the most expensive–they are the most heavily promoted, he said, so that is going to bring prices down. He said teen smoking behavior is also based on other factors, peer influences, imagery, and “how less addicted teens are.”

Judge Kessler didn’t seem convinced. “I understand,” she said, “but your focus is on price sensitivity.”

2 Responses to “Price Elasticity, Marlboro Friday and MSA”

  1. Archie Anderson Says:

    If Philip Morris were allowed to give testimony for a defense from a different position other than from their knees they might enlighten judge Kesseler that a teen wearing a $225 pair of air Jordans sneakers, A $175 Starter jacket talking on a $200 cell phone with camera and MP3 player may not be a “bargain hunter” and purchase a $3.65 pack of Marlboros instead of the cheap brands purchased by legal American smokers.

  2. krueger Says:

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