Tobacco industry

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Tobacco industry is a widely castigated industry, which has periodically been subject to royal disapprovals, the whims of fashionable use, medicinal studies, smuggling, trade disputes, and bans. Nevertheless, British cigarette market is known to be the most profitable market in the world. There are two main companies that dominate UK cigarette industry, which control almost 90% of the market. So, the purpose of my essay is to analyse the industry characteristics, which from my point of view have helped the organization and the effectiveness of the cartel between the tobacco leaders. I will be looking at specific factors affecting the probability of co-ordinated interaction between Imperial Tobacco, Gallaher and BAT as well as at “cigarettes” as a product, leading us to a conclusion that will summarize that there is a form of tacit collusion between these three firms.

Collusion is defined as something very close, if not identical with, co-ordinated interaction. According to European Commission study the factors inhibiting or encouraging collusion will need to be examined on four levels in order to asses the likelihood of collusion. On the first of these levels, one needs to establish whether there are incentives to form a collusive agreement at the outset. There are specific factors affecting the probability of collusion in this particular case.

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   The first factor is, the number of leading firms and the percentage of the market they account for: the fewer leading firms in a given market, the more likely are such firms to engage in some form of co-ordinated interaction. UK is dominated by London-listed firms Gallaher and Imperial Tobacco, which together control almost 90% of the tobacco market. That means that, lower “transactions” costs required to engage in co-ordinated interaction – both the number of meetings or direct communications that might be required and the costs of observing and adjusting to other firms’ behaviour grow faster than the ...

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