Nonparametric Tests of Market Structure: An Application to the Cigarette Industry.

The revealed preference approach is used to construct a nonparametric test of the monopoly model and some simple generalizations of it, and the test is applied to data for the cigarette industry. It exploits the maintained hypothesis that variations in the excise tax charged on a package of cigarettes allow us to assess seller reactions to common exogenous variations in marginal cost. Results indicate that the monopoly hypothesis, and other simple models that do not embody at least a moderate amount of competition, serve as poor predictors of the effects of excise-tax changes on cigarette prices, sales, and revenues. Copyright 1987 by Blackwell Publishing Ltd.