The Economics of Nicotine Consumption

The development of nicotine replacement therapies and e-cigarettes emphasize and highlight that, in tobacco demand, nicotine is one of, if not, the primary object people want. This chapter presents a simple model of utility maximization that focuses specifically on nicotine as the object of interest. It yields a derived demand for a nicotine delivery technology and predictions researchers can use to account for patterns in consumption over the life-cycle of individuals and the market as a whole. The model is informed by available evidence about the neurological effects of nicotine and differences in the relative efficiency and associated physical costs of nicotine delivery devices, and genetic differences across individuals that partly explains variation in nicotine consumption. The analysis highlights that one of the key theoretical objects of interest is the price per unit of nicotine delivered to the brain. The limited empirical literature on e-cigarettes does not measure that price. All told, economists have much to offer in modeling and empirically studying demand for the new nicotine delivery products. In addition, a range of studies could look back, reconfigure prices and measured consumption, to better explain patterns in historical time-series data on consumption and substitution across different nicotine delivery devices.