An economic analysis of addiction: The case of cigarettes with a proxy for addictive stock

The primary goal of this research is to determine the roles played by price during consumption of the addictive good cigarettes. The standard economic instrument elasticity will measure price sensitivity. Elasticity measures the percentage change in quantity consumed divided by the percentage change in price. The model that determines the components of demand is derived from the theory of rational addiction introduced by Becker and Murphy (1988). The rational model suggests that even strong addictions are the result of forward-looking utility maximization with stable preferences. The main contribution is that addictive goods are sensitive to prices--past, present and future prices. A myopic model is offered for contrast to determine if the consumer is considering the future during current consumption decisions. The final objective is to determine the effectiveness of past stress as a proxy for addictive stock. The typical substitute for addictive stock in the rational models is a third measure of consumption. The data analyzed in this study contains just two measures of consumption so an alternative proxy for the latent variable was estimated using the Holmes and Rahe (1967) Social Readjustment Rating Scale as a foundation. The results yield a current price elasticity (-.693) that falls well within the range of the Select Published Studies called out in the Surgeon General's Report for the year 2000 (-.05 to -1.89). The addictive stock variable measured using the Social Readjustment Rating Scale is significant. The positive significant coefficient on future price indicates that the rational model more accurately reflects the consumption decision than a myopic description. The significant coefficient on addictive stock indicates that stress has some predictive value in the decision to smoke. The magnitude of the current price elasticity, within the ranges of OSHA highlighted studies, leads the author to believe that the model is a reasonably accurate reflection of the decision to continue to smoke.