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Finessing the Political System: The Cigarette Advertising Ban

1988; Wiley; Volume: 54; Issue: 4 Linguagem: Inglês

10.2307/1059521

2325-8012

Mark L. Mitchell, J. Harold Mulherin,

Corporate Finance and Governance

Success in various competitive venues-athletics, card games, politics, war-often comes not from one's direct actions, but from the induced behavior of one's opponent. In bridge, for example, a finesse cannot work unless the opponent falls for the ruse. But when successful, the finesse adroitly turns the opponent into an unwitting partner. In this vein, consider recent proposals in Congress concerning cigarette advertising. Bills such as the Health Protection Act of 1986 seek to complete the ban on the advertising of tobacco that began with the removal of such ads from TV and radio in 1970. The proponents of the legislation apparently believe that the total banishment of cigarette advertising will lessen the demand for tobacco, thereby improving the health of the citizenry.2 Using developments from modern regulation theory, we posit instead that the current proposals to broaden the advertising restrictions are prime evidence of finesse within the regulatory system. Constraints on advertising can be expected to limit brand entry in the cigarette industry.3 The ultimate result of the cards currently being played by the anti-smoking activists, therefore, will be higher profits for their opponents, the tobacco companies. To test our position, we analyze the stock returns of the major tobacco firms. Our finding of positive, abnormal returns around the period of the 1970 TV and radio advertising ban is consistent with the view that the ban limited brand entry and decreased competition in the industry.