Rational Addiction when there are Two Addictive Goods: Cigarettes and Smokeless Tobacco

The seminal paper by Becker and Murphy (1988) proposed a model acknowledging both addiction and rationality in the consumption of addictive goods. We extend this rational addiction model to include two addictive consumption goods, where the goods may be substitutes or complements, and may accumulate a common habit stock or separate habit stocks. The generalization to more than two addictive consumption goods is straightforward. As an empirical example, we apply the proposed model to the Swedish tobacco market, where, in addition to cigarette smoking, the use of a particular kind of smokeless tobacco, snus, is widely spread. Demand equations are estimated using aggregated annual data for the 1964-1997 period. We find that our rational addiction model is not appropriate for describing the demand for cigarettes, but works well for describing the demand for snus. We find a negative but small price elasticity for cigarettes and a positive price elasticity for snus. This latter effect is partly explained by preference shifts away from cigarettes and towards snus. The cross-price elasticities are negative which means that the two tobacco products are complements. Thus, it is not advisable to encourage the use of snus since it is a gateway to smoking, and vice versa.