NCPA - National Center for Policy Analysis

How The Tobacco Settlement Protects Big Tobacco

July 12, 2001

The 1998 Master Settlement Agreement between the four major tobacco companies and state attorneys general has created a Big Tobacco cartel and stifled competition from small cigarette makers, critics charge.

Thus, despite the quarter-trillion dollars tobacco companies will pay the states, the four major cigarette companies have increased their sales, profits and stock prices, and control more than 96 percent of the market. Meanwhile, cigarette prices at wholesale have risen nearly 80 percent since the agreement was signed, not including taxes.

  • In effect, the agreement forces all tobacco companies -- even new companies and companies which weren't part of the settlement -- to pay "damages" and restrict their advertising.
  • Also, non-signatory companies must post pro rata damages, based on sales, in escrow for 25 years to offset any liability that might later be assessed -- thus preventing new entrants from cutting prices and gaining market share.
  • If small companies and new entrants agree to sign the deal, they are permitted to increase their market share by 25 percent -- a small concession to a company which might have only a fraction of 1 percent of the market, but a guarantee of continued dominance of the big four firms.

Private challenges to the agreement are pending in two federal courts of appeal.

Some legal scholars say the agreement violates antitrust laws and provisions of the U.S. Constitution that give Congress the sole power to regulate interstate commerce and require congressional approval for compacts between the states.

Source: Robert A. Levy (Cato Institute), "The Golden Goose: Far From Crippling Cigarette Giants, States Save Them," Investor's Business Daily, July 11, 2001.


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