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February 16, 2005

States' tobacco settlement update

The Feb. 28 issue of Forbes magazine includes an interesting piece (registration required) by Scott Woolley that describes the antitrust challenge brought by International Tobacco Partners against the 1998 "Master Settlement Agreement" between 46 states and the four largest cigarette makers. The case was argued to a Second Circuit panel earlier this month. Woolley describes the scene: An attorney from the New York Attorney General's office

declared that to believe the states had sold out to Big Tobacco, you would have to assume that 46 attorneys general are liars.

"That's tempting," Judge Guido Calabresi shot back. "It may be that when the states were offered a stake in a monopoly, they took it."

In getting the four cigarette titans to agree to pay the states princely sums, which would require price increases, the states agreed to help the big brands avoid getting undersold by discounters. They did so by requiring even new off-price brands to pay roughly the same level of fees (now about 40 cents a pack). The states were disarmingly transparent about their intent: to "fully neutralize" the competitive advantage of the discounters, the settlement says.

The article refers to a recent study by Duke Univesity health economist Frank Sloan and others, that shows that the settlement "raised both profits and stock prices of the big [tobacco] companies." Click here to read the abstract of the article, "Impact of the Master Settlement Agreement on the tobacco industry," which appeared this year in the journal Tobacco Control. Its conclusion: "The experience during the post-MSA period demonstrates that the MSA did no major harm to the companies. Some features of the MSA appear to have increased company value and profitability."

Posted by Michael DeBow at 06:35 PM | TrackBack (0)

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