Cigarette Oligopoly

Cigarette Oligopoly Market Chayleen Marquis Benedictine University Author Note This research is being submitted on May 2, 2010, for Professor Raymond Bell’s MBA 611 course at Benedictine University by Chayleen Marquis. The cigarette market is one that is known to everyone. From magazine advertisements to constructive commercials people have been exposed to this market starting at a young age. The constant visuals of the advertisements as well as the free advertising that occurs daily with people smoking outside their office, in their car, and outside the night life scene the cigarette market has a benefit of using the free advertising as a benefit to their company at no cost. The cigarette market is a clear example of an oligopoly market because it is mostly run by a few large firms such as Philip Morris USA, Commonwealth Inc, Lorillard Inc and Reynolds American Inc. Due to the fact that an oligopoly market is hard to not only come into but also basically controlled by these large firms any new competitor is going to have a difficult time entering this market, being profitable in comparison to these firms and really having any type of say in the price or the output. A benefit of being an oligopoly is the fact that the prices are not determined for them but the larger firms more or less make the prices in reflection of the coordination amongst each other. Essentially the large firms come together and decide what price they would like to see and then all of the cigarettes cost the same amount across the board. Of course one concern that oligopoly’s must make sure that they are not be involved with is price fixing. Price fixing is when the competitors of a market fix the product price to avoid competition within their market, while at the same time not being fair to the consumers of the product in regards to the price. The price fixing does not always happen between the competitors but it also can be a factor between manufacturers and distributors. So as an oligopoly the firms must ensure that the price fixing is not occurring at any levels of their production. Most people look at an oligopoly market and think that they act as a monopoly because the main firms completely control the market. However in an oligopoly the main firms each have a distinguished product brand that sets them apart from their competitor even f it is in the smallest difference. These brands allow each firm to stake claim on consumers in a memorable way to keep consumers coming back for more. In reference to the cigarette oligopoly most consumers have smoke Marlboro’s from the beginning of their smoking career and have never strayed from the product that they know. In an oligopoly market if one firm drops their prices another firm is more likely to drop their prices as well to not only stay competitive but to also retai n their market share. However if a firm were to increase their prices the other competing firm will not like raise their prices obviously to try and maintain as well as try to increase their market share. Price increasing is not something that occurs often in an oligopoly market which in turn makes the market inelastic in regards to price change. The use of the game theory is commonly used in oligopoly markets such as the cigarette industry. Making moves in the market without fully knowing how your competitors are going to respond and knowing that if one move that is made can definitely benefit all firms is a tough task to attempt. Making a decision that could help out the companies is not always going to be perceived by the other companies and can back fire on the company who makes the initial decision which in turn would leave them more than likely with a net loss. In the cigarette oligopoly market I see promotion as a game theory used between the competing firms. Many different events are held and it seems that the cigarette firms are there to give away free samples of their new products, free t-shirts and of course creating a bond with the consumer which makes them stay a loyal customer and even gets some consumers to switch products. An example would be from Camel cigarettes to Marlboro cigarettes. As mentioned before advertisement is something that drives the cigarette oligopoly. With the promotions being such a market to get more and more people daily to advertise freely for the company cigarette firms use every opportunity to do so. Primarily during these promotion periods the cigarette companies will use the foot traffic to do the free advertising for them. This is an extremely smart move because in reality who does not want a free t-shirt. The competing firms do not know when competition is always having a promotion such as the ones mentioned above and could see a decrease in sales during a competitor’s promotion or even right after one. Another example of the game theory used in the cigarette oligopoly market is when purchasing a regular firm product giving out a free ull size sample of a new product to get consumers to try it, which then leads to the consumer not having to purchase their product for a longer period of time. In the cigarette industry I believe that profit has been maximized. There are not a lot of changes that can keep occurring in this industry that can great greater profits than the ones occurring right now. There is only so much change that the cigarette market can endure and change that I believe the market has no new product line to go to. The cigarette market is such an intricate market with a product that has been sold the same way for years and year’s people don’t want it to change. The only profit the cigarette industry is going to see is when prices rise slowly due to inflation. Other than taxes being enforced by states and the federal government the price for a pack of cigarettes is not going to change drastically by any firm in caution of losing its market share. The competition in the cigarette market is beneficial to the consumers because of the promotions they provide with all of the free merchandise. Unlike other oligopolies the cigarette market is not elastic so price changes that would occur in other oligopoly markets that affect the consumer don’t not occur in the cigarette market. Competition in other oligopoly markets can directly negatively affect the consumer but because the cigarette market is a market that change rarely happens, prices are the same regardless the brand the competition is a benefit. In conclusion the cigarette market oligopoly market is a pretty stable very profitable market that has proven to stand the test of time, anti-smokers protests and even recessions. This market has a proven track record and has no intent to go anywhere. With the ability to use consumers for free advertising this market has saved money in the marketing department which usually helps fight law suits but still keeps its consumers coming back for more each week. The amount for a pack of cigarettes today is between four and five dollars and for the amount of smokers that casually smoke to the addicted smokers who go through a pack a day the cigarette market is not going anywhere and profits they are seeing are simply astounding. References Thomas, C. R. , & Maurice, S. C. (2008). Managerial Economics (9th ed. ). New York, NY : McGraw-Hill Irwin. Market Information-Philip Morris USA. (n. d. ). Retrieved April 26, 2010, from http://www. pmusa. com/ed/ cms/Company/Market_Information/default. aspx