'Baptists, Bootleggers & Electronic Cigarettes': A response to Professor Berman
The Food and Drug Administration's decision to regulate electronic cigarettes as tobacco products under federal law could do more to benefit Big Tobacco than to safeguard public health. Major cigarette manufacturers stand to benefit from regulations that both reduce the comparative advantage of electronic cigarettes and constrain competition within the e-cigarette market. For this reason, it should be no surprise that the Big Two tobacco companies—Altria and Reynolds—supported the FDA's proposal to begin such regulation.
In a paper forthcoming in the Yale Journal on Regulation, "Baptists, Bootleggers & Electronic Cigarettes," Bruce Yandle, Andrew Morriss, Roger Meiners and I place the debate over the regulation of electronic cigarettes in the broader context of the history of tobacco regulation. (The full paper will be available shortly. In the meantime, an early draft is available here.)
Building on prior work by Morriss and Yandle showing that Big Tobacco has a long history of using regulation to suppress competition, we explain why it is in the interest of the big cigarette companies to suppress competition from electronic cigarettes, both to prevent the loss of tobacco consumers to e-cigarettes and to make the e-cigarette market easier for Big Tobacco to dominate, at the expense of the smaller e-cig producers that generated the new form of competition.
In short, Big Tobacco would like to use regulation to do for e-cigarette markets what has already been done to cigarette markets. In these efforts, Big Tobacco (which was the Big Four, then the Big Three and now the Big Two) has often joined forces with public health groups to support greater regulation, forming a "bootlegger and Baptist" coalition. So, for example, tobacco giant Altria joined forces with some anti-smoking groups to draft and then lobby for the Family Smoking Prevention and Tobacco Control Act. This law helped suppress competition in cigarette markets and is the source of the FDA's purported authority to regulate e-cigs—authority that both Big Tobacco and many anti-smoking groups encouraged the FDA to use.
Professor Micah Berman of Ohio State University's Moritz College of Law takes issue with our analysis, arguing we let "theory get out ahead of the facts on the ground." According to Professor Berman, there is "limited evidence" that economic interests, most notably Big Tobacco, have helped push for regulation of electronic cigarettes and that evidence of "Baptist and Bootlegger" support for the FDA's deeming rule is "lacking." We disagree, and stand by our analysis.
Professor Berman writes that he is "not aware of any tobacco industry comments that were supportive of FDA regulation of e-cigarettes." I suppose that is because Professor Berman did not look for them. Altria (parent company of Philip Morris, maker of Marlboro) filed comments in support of the deeming rule (available here) and made no secret of this position, declaring its support for the deeming rule on its website. (Altria's comments are accessible both on its website and in the rulemaking docket on Regulations.gov.)
Altria was not alone. Reynolds subsidiary RAIS filed comments in support of the FDA deeming rule as well. Further, as Professor Berman notes, Reynolds called upon the FDA to ban all "open-system" e-cigarette and vaping products. Why? Because Reynolds manufactures the popular Vuse e-cig. Should the FDA refuse to take such a drastic step, Reynolds urged it to subject e-cigarettes to the same degree of regulation as traditional cigarettes, creating a uniform regulatory environment that works to the benefit of Big Tobacco.
Producers of smoking cessation products, such as GlaxoSmithKline (which sells nicotine gum and patches), supported the FDA's deeming rule too. This is because e-cigs compete with gums and patches as smoking cessation and reduction aids (and many smokers find e-cigs to be more effective nicotine delivery devices than gums or patches).
Whether or not one thinks the FDA deeming rule is a good idea, that Big Tobacco companies and other economic interests supported the rule should be beyond dispute. As some public health groups supported the rule as well, the claim that tobacco "bootleggers" joined pro-regulatory "Baptists" in pushing for greater e-cig regulation should be beyond dispute.
Why would Big Tobacco support the FDA's deeming rule? Because it is in their interest. Both when the deeming rule was proposed and when it was finalized, financial analysts, such as Bonnie Herzog at Wells Fargo, judged the rule a win for Big Tobacco. Subjecting e-cigs to the same regulatory controls as cigarettes makes it more difficult for e-cigs to gain market share from cigarettes. It also channels advertising, promotion, and shelf-space-acquisition efforts into those avenues already dominated by the big producers. And Big Tobacco is not done. As we discuss in the paper, Big Tobacco stands to benefit from subjecting e-cigs to the terms of the Master Settlement Agreement (as some legislators have proposed) and greater taxes on e-cigs. It's no surprise that Reynolds supports e-cig taxes (despite producing a popular e-cig brand of its own).
Professor Berman further argues that our work rests on the assumption that e-cigs "function as a substitute for cigarettes." Yes and no. As noted above, we argue that Big Tobacco stands to benefit from e-cig regulation in two ways—by making e-cigs less competitive against traditional cigarettes and by making the e-cigarette market easier for Big Tobacco to dominate. Only the first of these claims rests on the assumption that e-cigs function as a substitute for cigarettes. Professor Berman does not even address the other.
That e-cigs function as a substitute—that is, that some of the demand for e-cigs comes at the expense of the demand for cigarettes—is indisputable. First, as is well-documented, the majority of e-cig users are current or former tobacco users. (See, e.g., here.) Some use e-cigs to help them quit smoking, while many others use them as a replacement for some portion of their cigarette consumption. In other words, for a substantial share of the market, e-cigs "function as a substitute for cigarettes."
There is further evidence that regulation of e-cigarettes benefits Big Tobacco. For example, two recent studies (here and here) have found that the adoption of measures to reduce youth access to e-cigarettes results in increased teen smoking rates. This occurs because cigarettes and e-cigs function as substitutes for one another, at least in this portion of the market. This, more than flimsy "gateway" hypotheses, may explain why youth smoking rates have dropped as youth e-cig use has increased. (As a father, I'd prefer my kids use neither, but there's also no question that smoking is far more dangerous than vaping.)
There's lots more to take issue with in Professor Berman's post, but the above should suffice to explain why we claim that Big Tobacco has played the role of the "bootleggers" in a "Baptist and bootlegger" coalition supporting greater regulation of e-cigarettes. This fact alone is not enough to demonstrate the the FDA's regulations are ill-advised, but it does place the FDA's regulatory initiative in context.
As noted above, our paper in the Yale Journal on Regulation will not be out until later this summer. Those interested can find an early draft on SSRN here. Note that the paper has been updated substantially since then.
DISCLOSURE: In 2014, I co-authored a white paper on the political economy of e-cigarette regulation for which my co-authors and I received compensation from NJOY, an e-cigarette manufacturer. NJOY exercised no control over the conclusions of that white paper, and I have not maintained any relationship, economic or otherwise, with NJOY since completing that work. All of my conclusions about e-cigarette regulation are my own.