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Moral hazard and the hazard of morals

By Professor John Walsh - November 2012

From the late 1960's, tobacco companies marketed low-tar or "light" cigarettes as being less harmful.  Indeed, laboratory tests proved as much, leading government agencies to encourage smokers to switch to these new, allegedly "safer" products.   Unfortunately, these tests whereby machines simulated smoking and monitored the intake of nicotine, tar etc. did not account for the behavior of actual smokers.  When a smoker smoked a light cigarette, he simply compensated by taking a deeper draw, meaning that the smokers of light cigarettes were at equal risk as those smoking higher-yield products.  As a result, many countries now prohibit marketing light cigarettes as being less harmful, or even implying so by calling products "light."  And, as a consequence of this history, regulators, and perhaps even tobacco companies themselves, are a little gun-shy of harm reduction claims being made.

Most will agree fewer cigarettes being consumed benefits the health of the population as a whole.  But, to get there, total bans or making cigarettes illegal is an unlikely path.  Most governments have imposed hefty cigarette taxes and reduced places where cigarettes can be consumed.  In many countries the number of smokers has fallen as has the number of cigarettes consumed per smoker.

Nowadays, however, there is reasonable evidence to suggest there are products, some similar to cigarettes and some quite different, some tobacco-based and some not, that may appeal to smokers and are demonstrably less harmful than cigarettes.  And, it is likely that if smokers would shift their nicotine consumption to them, the world would be a healthier place.

Undoubtedly, the experience with light cigarettes casts a shadow over the "new, less-harmful" products.  And, they pose different dilemmas for tobacco companies and the anti-tobacco organizations that campaign against the sale of tobacco and nicotine-containing products.

The primary issue facing tobacco companies is: do they position these products to smokers as a way to stop smoking while continuing to consume nicotine or as a replacement to cigarettes entirely?  In essence, are these products to be complimentary to cigarettes or a substitute to them?  Obviously positioning them as a compliment might benefit the core business.  Yet, from a marketing perspective, positioning a new product as more-or-less an inferior alternative to cigarettes to be consumed whenever one can't have what one really wants, will hardly lead to a successful product launch.

Many anti-smoking and anti-tobacco organizations have sprung up since the "light" cigarette debacle.  And how do they view these potentially lower-harm alternatives?  With great scepticism, it must be said.  Potentially reducing harm but continuing to feed a nicotine addiction is an unwelcome outcome for anti-tobacco campaigners. They fear that reduced-harm products will assist smokers to sustain their habit by providing opportunities to feed a nicotine addiction when/where smoking is prohibited. They would rather people quit smoking than prolong smoking with the aid of a compliment. In addition, they worry that additional nicotine products being on the market could be a route young people, or heretofore non-smokers, would take to becoming smokers.  And, they worry that these reduced-harm products might be consumed with reckless abandon, making them potentially more harmful than cigarettes.  After all, "reduced harm" is a long way from "safe."

For society as a whole we must balance these alternative perspectives and the nub of the issue is this: do we fear more the moral hazard or the hazard of morals?  We could experience moral hazard in two ways: 1) smokers might feel lower risk is cause to increase consumption of reduced-harm products, thereby off-setting much of the potential societal benefit.  2) non-smokers might start consuming lower-harm products.  Alternatively, do we fear more the hazard of morals? That is, perhaps a moralistic approach to cigarette cessation, looking to smokers to quit smoking while prohibiting attractive alternatives being put on the market, might lead to fewer smokers quitting cigarettes. 

Reduced-harm products will do good for society if smokers switch to them and consequently reduce or cease their cigarette consumption.  Unfortunately, their behavior with reduced-harm products might change, as it did with light cigarettes, reducing the potential benefit.  For reduced-harm products to succeed they need to be marketed in an attractive way to smokers, and if they are attractive to smokers, they may also be attractive to non-smokers.  In brief, the trade-off between moral hazard and the hazard of morals leads us to looking at the potential benefit to smokers and the potential harm to current non-smokers.

John Walsh is Professor of Marketing at IMD and Director of the Building on Talent program, which is for high-potential managers early in their careers looking to take on greater responsibility.

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