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Tobacco industry

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Introduction

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. ...read more.

Middle

In our case the concentration ratio of the tobacco industry is equals to... this confirms the prediction that is provided by economic theory is that higher levels of concentration are likely to result in higher prices and losses in allocative efficiency. Secondly, it is known it there is an evidence of collusion in the same market in the past it is likely that the market conditions are conductive to co-ordinated interaction. As we can see from the case study, two years ago separate allegations surfaced that BAT, the third large firm in UK cigarette market, in the early 1990s colluded with rival manufacturers including Philip Morris and RJ Reynolds to fix prices in overseas territories. Thus, this is a factor that from my opinion has helped the organization of the cartel. Fears of collusive activity are, by and large, confined to industries in which the products are relatively homogeneous, with little differentiation or customization is yet another factor that can be applied for cigarette market. ...read more.

Conclusion

From the discussed factors, we can see that there is some degree of interdependence between the leading firms, which in most cases results in collusion. Why do they do it? Well, cigarettes are homogeneous products, with a relatively inelastic demand, almost 90% of the market is controlled by just 2 firms, there are substantially high entry barriers, and there is an evidence of collusion in the same market in the past. However investigations are still being carried out, and I have tried to apply my knowledge and research to show that there is and always have been tobacco cartels not only in UK market but other world-wide cigarette industries. There are many ways to reduce the incidence and severity of co-ordinated interaction, but in this case none of them would be relevant, because smoking kills, and bringing competition, thus more tobacco firms to an industry, will lead to expansion of such products. Whereas, the government should be concentrated in developing different product to encourage people to give up smoking, but this largely lies outside the scope of the current paper. ...read more.

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