In Malaysia, there are three main dominant companies of the tobacco market and this included British American Tobacco(BAT) Malaysia. British American Tobacco (BAT) Malaysia Berhad was formed from the combination of Rothmans of Pall Mall Malaysia Berhad and Malaysian Tobacco Company Berhad on 3 November 1999. However, their history have more than 100 years in Malaysia since 1912 and is now located at Petaling Jaya, Selangor. This company manufactures and sales or import high quality tobacco products to meet consumer preferences. Their cigarette brands portfolio includes well-established international names such as Dunhill, Pall Mall, Kent and others as well. As you can see, they are holding a huge market share in Malaysia. BAT Malaysia hold the market share of about 63% and amongst the top 25 companies on Bursa Malaysia Securities Berhad in the market capitalization (BAT Malaysia, 2013). They employ almost 1000 employees to work in the full spectrum of the tobacco industry. The employees involve in buying leaf, processing to manufacture, distribution and marketing. Those employee have the medical education and awareness training of motivation to conduct their daily works with the safe, responsible and healthy manners. These are aims to maintain their leadership in the high standard industry, increase their share of the tobacco business and satisfy the demands of consumer .By this, they can show that their brands are more profitably than their competitors. To achieve these goals, they always make sure their market responsibly and sensitive to the environment.
British American Tobacco (BAT) Malaysia is one of the tobacco industry which is also an example of oligopoly market. An oligopoly is the market structure with a few numbers of firms dominates in the large market(Tucker, 2011). BAT Malaysia is considered as an oligopoly because it is the one combined with two tobacco companies predominates the cigarette market. Although there are only few number of firms or sellers in an oligopoly market but there are many buyers in their cigarette market. Their market is a high market concentration control by oligopolist. On the others hand, BAT Malaysia is also earning supernormal profits no matter it is short-run or long-run as many firms belong to oligopoly have nearly blocked the entry for the new entrants.
Supernormal Profit
The reasons that most of the new entrants of tobacco industry nearly blocked by BAT Malaysia are because of the economics scale, substantial investment and government legal barriers. In our country, the barriers to enter their tobacco firm is really high. Why I say so? This is due to the British American Tobacco Malaysia is under the British American Tobacco group and it is the world’s second largest tobacco industry with global market share. The same tobacco company competitors like JT International Bhd (JTI) and Philip Morris International (PMI) have been around over the times, therefore it is hard for the others new entrants to survive in the tobacco industry in this country. It is mostly blocked. So, one of the trade barriers of BAT Malaysia enjoys is the economics of scale. Economics of scale is defined as when increasing in the efficiency of production leads to a lower long-run cost of output and the average cost is decreasing (Curran, 2007).
Besides, the price for cigarettes is keeps increasing. Recently, the government has enforcing a new price control and new rules to the cigarette market. This causes British American Tobacco (BAT) Malaysia needs to make an announcement about a new price will go up minimum RM1.50 and that is increase by 14 % for the price of its cigarette brands. The following new price list has already effective start from 1st of October 2013.
Cigarette Brands
|
Price in June 2013
|
Price in October 2013
|
DUNHILL
|
RM10.50
|
RM12.00
|
KENT
|
RM10.50
|
RM12.00
|
PETER STUYVESANT
|
RM9.00
|
RM10.50
|
PALL MALL
|
RM9.00
|
RM10.50
|
BENSON & HEDGES
|
RM10.50
|
RM12.00
|
LUCKY STRIKE PLAIN
|
RM10.90
|
RM12.50
|
( The Star, 2013)
By this, we can know that BAT Malaysia is also an interdependence oligopoly. This is because BAT Malaysia has the largest share in the cigarette market, so its can play the role as a price leadership. Price leadership is the firm that dominates in the large market to sets the price and the others will follow. This means that, when BAT Malaysia increases the price of the cigarettes, it will influence the others two firms such as JTI and PMI. JTI and PMI will be follow to the price increased of the BAT Malaysia in the coming days. The situation setting a minimum price is known as price floor intervention by government, which is also a type of price control. Consumers cannot buy the cigarette at a lower price than the price that was set. In economic theory, The law of demand states that when the prices of goods go up, the quantity demanded of its will go down (Ehrbar, 2008). Making cigarettes are elastic goods. Why some of the smokers will lose interested when the prices are becoming higher ? This situation is known as income effect: smokers decrease their daily purchase of cigarettes due to the purchasing power. For example, Jackson is a daily smoker who smokes 2 packs of Dunhill cigarettes per day which cost him RM10 for each pack. When the price increased for a pack of Dunhill cigarettes by twice of the price before that is RM20, Jackson might considers consume for 1 pack of cigarettes per day as his purchasing power has decreased. So, smokers can solve this problem is to smoke less.
Government uses price floor to avoid prices from getting too low by setting it above the price equilibrium .There have some disadvantages of this price floor. One of them is BAT Malaysia may because of the price increased of cigarettes and supply more but the quantity demanded of the cigarettes may not increase. This will occur a surplus, a supply overstock .
However, cigarette is an inelastic good. An inelastic good has a constant demand curve despite the price increased .This is because maybe the price increased for cigarette will cause the quantity demanded slightly decrease, especially for the lower level income consumers. But, this would not affect richer consumers as they can afford the price that is above the price floor or equilibrium level. No matter how much the price of the cigarettes increase, there will still have buyers in the cigarette market This is depends of consumer behaviour but not according the price of cigarette. Smoking can make the consumers addicted, they cannot simply stop from purchasing cigarettes.
Inelastic Demand
There is a survey make by BAT Malaysia show that most of the consumers are willing to spend more than to actually quit this habit. Some smokers admitted that the pricing may be hard for them but it is not likely that they will stop smoking. There is a retiree named John even say that he plans to buy illegal cigarettes that are smuggled into the country. Due to the effect of substitution, consumers will try to look for others cheaper brands cigarette or alternative sources of the particular cigarette. Malaysian smokers can simply change to a cheaper substitute cigarettes such as illegal cigarettes. The demand for illegal cigarettes will keeps increasing, as the price for a pack of illegal cigarettes is still the same for the past 10 years that is RM2 to RM3.50 each .For instance, Joyce has two choices to choose between two common drinks which are Pepsi and Coca Cola. Each drinks is a substitute for one another. When the price of Coca Cola becomes higher after an economic breakdown, but the price of Pepsi remains the same, Joyce for sure will purchase the cheaper brand. So, if the price (P) of Coca Cola increased, the demand (D) for the substitute of Coca Cola, which is Pepsi will also increase. This is the similar case with general cigarettes and illegal cigarettes. When there have substitute cigarettes and the prices are cheaper than the general cigarettes, it will causes the demand curve of substitute cigarettes shifts to the right.
Substitute effect for one good to another good
In my opinion, as BAT Malaysia is the Malaysia’s largest tobacco company that operating in a controversial industry, I believe they have playing the role in taking and shaping the lead of responsibility agenda in our country. They provide information, ideas and practical steps to help regulators address the key issues around their cigarettes brands. They always engage with good faith by taking their impacts seriously. They are committed to work with the organisations of government and non-government, and welcome opportunities to participate for achieving real progress.
Curran, J. (2007) Taking the Fear Out of Economics. 2nd ed. UK: Thomson.
References
BAT Malaysia (2013) Who we are. Available from: http://www.batmalaysia.com/group/sites/BAT_7RYJ8N.nsf/vwPagesWebLive/DO7SUK8D?opendocument&SKN=1. [Last Accessed 21 Oct 2013].
The Star Online (2013) Cigarette prices go up. Available from: http://www.thestar.com.my/News/Nation/2013/10/01/Cigarette-prices-go-up-Smokers-have-to- cough-up-more.aspx [ Last Accessed 21 Oct 2013].
Ehrbar,A. (2008) The Concise Encyclopedia of Economics.Supply. Available from: http://www.econlib.org/library/Enc/Supply.html [ Last Accessed 21 Oct 2013].
Tucker, I.B. (2011) Economics For Today. 7th ed. Canada: Nelson Education.
Ehrbar,A. (2008) The Concise Encyclopedia of Economics.Supply. Available from: http://www.econlib.org/library/Enc/Supply.html [ Last Accessed 21 Oct 2013].
Tucker, I.B. (2011) Economics For Today. 7th ed. Canada: Nelson Education.
Curran, J. (2007) Taking the Fear Out of Economics. 2nd ed. UK: Thomson.
