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Tobacco profits could rise
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September 22, 1997: 12:30 p.m. ET
FTC says antitrust exemption might cause big price hikes, boost earnings
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NEW YORK (CNNfn) - The proposed $368.5 billion settlement between 40 state Attorneys General and tobacco companies may end up boosting cigarette makers' profits, the U.S. Federal Trade Commission said Monday.
In a staff report issued to Congress, the FTC questioned the antitrust exemption contained in the settlement, which allows tobacco companies to coordinate their activities to achieve the settlement's goals.
"Cigarette manufacturers, through more effective coordination [could] raise prices by more than necessary to simply 'pass through' to consumers the amount of the annual payments," the FTC said.
After that, tobacco companies could raise prices even more and pocket the profits, according to the agency.
The report also said that the payments could end up netting the public sector less than $368.5 billion because the payments are tied to the amount of tobacco consumed, which could fall off due to higher prices.
Analysts say that higher prices may not necessarily mean lower cigarette sales. "When tobacco companies have raised prices, consumption stays virtually the same," said tobacco analyst David Williamson of Swiss American Securities.
"There's really been no hard data to suggest that increases in tobacco prices actually deter smoking." He cautioned, however, that cigarettes prices have never been raised quite so steeply as might occur due to the settlement.
A spokesman for the tobacco industry said the companies are still reviewing the statement.
Last week, President Clinton announced changes he would seek to the tobacco settlement, chief among them being the raising of cigarette prices by $1.50 per pack over the next decade, as well as meeting lower rates of teen smoking. Absent from those changes was any mention of antitrust concerns.
Tobacco stocks closed firmer Monday, with Philip Morris (MO) adding 1-7/32 to 42-15/32 and RJR Nabisco Holdings (RN) gaining 1-3/8 to 34-1/16.
-- Randy Schultz
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