During the 1960’s in America, every US based tobacco company was heavily advertising on TV. Warnings were issued by the government about tobacco use and it’s hazardous effects. The US government did not want cigarettes being advertised on TV due to these effects, and subsequently banned cigarette advertising on TV in 1971. We will examine how the Prisoner’s Dilemma that we learned about in class can be applied here. This relates to the class material as it is a real life application of the Prisoner’s Dilemma.
Say we have two cigarette companies; Reynolds, and Philip Morris. Each company has two choices; to advertise or not to advertise. The payoff in this case is the profit that each company can make. For example, if both do not advertise, then each company earns $50M profit. To advertise costs $20M, and with this, the company that advertises gains $30M in sales from their competitor’s profits. If both companies advertise, they both get the same amount of sales, and the profit for each company is $30M ($50M-$20M). The following table represents the payoff matrix.
If we were to look at Reynold’s perspective; if Philip Morris advertises, then we should advertise too, since we would make $30M, compared to $20M if we were to not advertise. If Philip Morris does not advertise, then we should advertise again in this case, since we would make $60M, compared to $20M. This is similar to the Prisoner’s Dilemma that we looked at in class. In this case, advertising is the dominant strategy as it gives the most profit no matter what the other company does.
Prior to the 1971 ban, both companies were heavily advertising, displaying the bottom right outcome. After the 1971 ban on cigarette advertising took place, the only possible scenario that was left was the top left outcome. As a result of this, advertising costs were significantly down, and profits were significantly up, as expected from the payoff matrix. In this case, the government’s hand helped to increase profits for both companies.
References:
Qi, Shi. “The Impact of Advertising Regulation on Industry: The Cigarette Advertising Ban of 1971.” The RAND Journal of Economics, vol. 44, no. 2, June 2013, pp. 215–48. https://doi.org/10.1111/1756-2171.12018
McAdams, D (2004). Game Theory for Managers. Massachusetts Institute of Technology. https://ocw.mit.edu/courses/sloan-school-of-management/15-040-game-theory-for-managers-spring-2004/lecture-notes/lec1.pdf
Wow, that’s fascinating how the well-intended government interference actually allowed those cigarette companies to make more profit, making the law counterproductive.
I do wonder though, if those laws eventually put a damp on those cigarette business’ profit which lowered cigarette usage? Would that explain the success of e-cigarettes nowadays?
Ah, interesting points. I do see more advertising for vapes & e-cigarettes now on TV, which probably did help in the success of both of them.