Mergers, Market Structure, and the Rise of E-Cigarettes (Job Market Paper)
Authors: Joon Ha Kim and Hansen Pen
Abstract: This paper investigates market power and consumer inertia in the vaping and tobacco industry, with a focus on substitution patterns between cigarettes and e-cigarettes in the context of market structure changes, including a major merger and a potential total ban on traditional tobacco. Using a structural demand and supply framework, we leverage both aggregate retail scanner data and household-level panel data to capture consumer heterogeneity and state dependence, examining how past choices influence current preferences. Our merger simulations indicate that products from both merging firms experience higher prices and lower sales, leading to a 0.72% decline in consumer surplus and a 1.05% increase in smoking-attributable health costs due to substitution to other firms. In the scenario of a total ban, e-cigarette prices rise alongside sales. These results provide insights into competitive dynamics and the policy implications of a consolidating nicotine market.