A Cost Function Approach to Dynamic Duality: An Application to the US Cigarette Manufacturing Industry

Abstract

The dynamic duality econometric approach with the case of multiple outputs is applied to the US cigarette manufacturing industry to test for the presence of adjustment costs and quasifixed inputs with regard to stocks of capital and tobacco. Capital and tobacco stocks are found to be quasi‐fixed inputs and the empirical results indicate that there are significant adjustment costs associated with adjusting these inputs. Short‐ and long‐run own‐ and cross‐price elasticities of factor demands are estimated for domestic and imported tobaccoes, materials, tobacco stocks, and capital. Output demand elasticities are also estimated. The two outputs, cigarettes produced for export and for the US market, are examined for equality of marginal costs. No evidence of differences in marginal costs was found. There is evidence that government restrictions on advertising have negative effects on output demand.