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The British Tobacco Industry Essay

1448 words - 6 pages

The British Tobacco Industry 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.

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 number of firms co-operating. A higher degree of interdependence
between the firms which in turn translates into more awareness of the
need to co-ordinate plus a higher probability that the firms will be
able to distinguish between the effects of cheating and changes in the
market demand. Last but not least, a less chance that firms will have
differing costs and other characteristics making it easy to agree on a
mutually profitable course of action. In antitrust analysis, “fewness”
and the share of the market accounted for by leading firms is usually
referred to as “concentration” and is commonly measured as the share
of the...

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