An oligopoly
is the market structure of a few large firms dominates in the industry. The
number of seller or firm in an oligopoly market is very few but there are many
buyers in the market. The market concentration of oligopolists is very high
although it is just dominates by a few firm. Some industry is producing
differentiated products or homogeneous products. Homogeneous products are goods that with no preferences;
differentiated products are goods with a lot of variety and with preferences. In a simple way, homogeneous are
products that are close substitute to each other and is an identical product.
The example of homogeneous products including cement and steel. The example of
differentiated products including automobiles, cigarettes and soft drinks.
Tobacco
industry is an example of oligopoly market. There are 3 major companies dominant
the tobacco market in Malaysia, they are British American Tobacco (M) Bhd
(BAT), JT International Bhd (JTI) and Philip Morris. The total market share of the
stated 3companies is about 91% in Malaysia. As can see, they are holding a huge
market share in Malaysia. BAT Malaysia hold the highest market share of about
61% and 18% and 21% respectively hold by JTI and PMI (The Star, 2008). Although
they are selling the same products, cigarette, but cigarette with different
taste and feeling from different brand name and companies differentiated their
products with each other. So cigarette is a differentiated product. Apart from
that, UK also proven through this article (https://www.keynote.co.uk/market-intelligence/view/product/10494/cigarettes-%26-tobacco).
Most of the firms under oligopoly have
almost blocked the entry for new entrants. This is due to three reasons,
economics of scale, government legal barriers and substantial investment. The
barrier to enter the tobacco industry in Malaysia is very high. As the British
American Tobacco Malaysia is part of the British American Tobacco group
(BAT Malaysia, 2013). Which BAT is the world’s most international group and the
second largest tobacco market group with global market share. The same tobacco
industry competitors like JTI and PMI have been around over the times, therefore
it makes difficulty for the new entrant to survive in the tobacco industry in
Malaysia. It is almost blocked. Therefore, BAT Malaysia is taking the
advantages of economics of scale. They have the advanced technologies over the
year. Economics of scale is about when increasing the scale of production leads
to a lower long-run cost per unit of output. Which means when the average cost
is falling (Curran, 2007).
Economies of scale
(http://althistory.wikia.com/wiki/No_Cigarette_Advertising_Ban_in_America). While
in US is according to this article (http://www.smokernewsworld.com/ban-on-cigarette-advertising/)
Apart
from that, the barriers to entry the tobacco industry locally is initially low.
This is proven in this article,
(http://webcache.googleusercontent.com/search?q=cache:rATfaomaKAMJ:www.personal.psu.edu/ajk5087/Industry%2520Analysis.doc+low+barriers+of+tobacco+industry+locally&cd=1&hl=en&ct=clnk&gl=my).
(http://webcache.googleusercontent.com/search?q=cache:rATfaomaKAMJ:www.personal.psu.edu/ajk5087/Industry%2520Analysis.doc+low+barriers+of+tobacco+industry+locally&cd=1&hl=en&ct=clnk&gl=my).
The tobacco industries in Malaysia
are non-collusive oligopoly or non-price competition. This is because the each
tobacco companies will perceives that its rivals will easily and quickly match
any price reduction. Besides that, the government tax of cigarette is always
increasing and had never decline. in order for government to reduce the demand
of cigarette, the most effective ways is to increase the tax (The Star, 2011). This
also applicable in the tobacco industry in Pakistan followed by the article (http://www.euromonitor.com/tobacco-in-pakistan/report).
Few days ago, BAT Malaysia had announced
the price of the cigarette hold by the companies increase by 3% due to the
inflationary pressure and rising input costs (The Star, 2013). They are
interdependence oligopoly. As BAT Malaysia is holding the biggest share in the
market, it is playing the role as a price leadership. Price leadership can be
explained of the firm that dominates in the market and sets the price that
others will follow. Which means that, when BAT Malaysia increases the price of
the cigarette, it wills bring awareness to another two firms. JTI and PMI will
be responding to the increases price of BAT Malaysia in the following days. This
also applicable in Altria Group through this article (http://www.marketwatch.com/story/altria-first-tobacco-maker-to-raise-prices-in-2012-2012-06-14)
Cigarette
Brands
|
Price
in 2012
|
Price
in 2013
|
DUNHILL
|
RM10.20
|
RM10.50
|
KENT
|
RM10.20
|
RM10.50
|
PETER STUYVESANT
|
RM8.70
|
RM9.00
|
ROTHMANS
INTERNATIONAL
|
RM10.60
|
RM10.90.
|
BENSON & HEDGES
|
RM10.20
|
RM10.50
|
LUCKY STRIKE PLAIN
|
RM10.60
|
RM10.90
|
(The
Star, 2013)
A
non-collusive oligopoly of tobacco industry in Malaysia is facing a kinked
demand curve. Kinked demand curve is being explained as the best prediction of
the behavior of an oligopolists and a kinked demand curve facing by
oligopolists that assumes the rivals will match a price decrease but ignore the
price increase (Tucker, 2011). The demand in assumption 1 is relatively
elastic. Besides that, the demand curve is relatively inelastic in the second
assumption. There are two assumptions when the BAT Malaysia made changes to its
cigarette price. In this case, BAT Malaysia had increased all of their
cigarette products by 3%. Will the other competitors followed? Back to the year
of 2012, due to the taxes increase by the government, BAT Malaysia had
announced their increasing price of 20sen. However, JTI and PMI remains
unchanged of their cigarette brand price, for more details it can be found in
this article (http://www.theedgemalaysia.com/business-news/223576-jti-and-philip-morris-maintain-cigarette-prices.html).
According to the kinked demand curve, PMI and JTI remain their prices unchanged
in the year 2012 this is because PMI and JTI can gain customer from BAT
Malaysia.
The demand for cigarettes is inelastic. This is because no
matter how much the price of the cigarettes increase, there will still be
buyers in the market. Due to cigarettes can make the consumer addicted, they
can’t stop purchasing cigarettes when they can’t get rid of the addiction to
the cigarettes. On an average of price rises 10%, the demand is expected to be
reduce by 4% in high income countries and 8% in low and middle countries. In
Malaysia, the estimated cigarette price elasticity is about 0.38. This means
that when 10% increase in the price of cigarette, the demand is tend to be
decline in 3.8% (The Star, 2011). This means that change in the price bring
lower effect to the changes in the quantity demanded and this resulting in a
steep curve.
For assumptions, the increasing of the raw materials in BAT Malaysia had pushed the marginal cost from MC1 to MC2. From the diagram, we can see that not a necessary lead to a higher price of the cigarette that MC2 cuts the MR curve at the same output (Q1). The gap between a and b where MR=MC the profit is being maximized. If the price MC of BAT Malaysia is lies between the point a and b, the profit maximizing price and output will be P1 and Q1. According to the theory of kinked demand curve, the price will be sticking to the market and the firms will concentrate more on non-price competition to earn revenues (Tutors2u, n.d.).
Supernormal Profit
The tobacco industry in Malaysia is earning supernormal profits
no matter long-run or short-run. This is because the barrier is almost blocks
the new entrants to entry. In oligopoly, the key feature of earning supernormal
profits by oligopoly is that a firm must consider the reaction of other firms
to its own actions. As a result, the kinked demand curve theory predicts that
price and output levels may be relatively stable in an oligopolistic market.
When BAT Malaysia increased their price in 2013 by 3%, PMI and JTI is about to
take proper action towards this.
This is also applicable in US through this article (http://www.parliament.nsw.gov.au/prod/parlment/hansart.nsf/V3Key/LC20001012031)
By and large, we can conclude that the tobacco industry is
earning supernormal profit due to they are an oligopoly. They have the power to
set the prices and others will always aware to their competitor’s action due to
they are interdependence. The barriers to entry this industry in Malaysia is
very high. In a summary, smoking is a bad habits and it can causes a lot of
cancer and disease and this had proven for centuries. If you love your family,
please quit smoking now to have a better life.
References
BAT Malaysia (n.d.). Who we are. [ONLINE]
Available at:
http://www.batmalaysia.com/group/sites/BAT_7RYJ8N.nsf/vwPagesWebLive/DO7SUK8D?opendocument&SKN=1.
[Last Accessed 05 June 2013].
Curran, J.
(2007) Taking the Fear Out of Economics [online]. 2nd ed. UK: Thomson.
[Accessed 06 June 2013].
“Delay
in 14-stick cigarette pack ban a risky move”, The Star, 01 Jun.
Tucker, I.B.
(2011) Economics For Today [online]. 7th ed. Canada: Nelson Education.
[Accessed 05 June 2013].
kinked demand curve under oligopoly. (n.d.) [ONLINE] Available at:
http://www.tutor2u.net/economics/content/topics/monopoly/kinked_demand.htm.
[Last Accessed 04 June 2013].
“Kjeldsen-kragh, S. (2002) International
Economics [online]. Denmark: Copenhagen Business School Press. [Accessed 06
June 2013].
Tan,
Y and Adnan, H. 2008, “Cigarette price war”, The Star, 11 Nov.
Way
to snuff out habit”. 2011, The Star, 04
October