This essay focuses on the tobacco industry with respect to its oligopolistic market structure. The basic characteristics of the oligopoly are discussed and followed by the identification of the tobacco industry as a tight oligopoly. The various market forces and the resulting threats associated with the market structure are then elaborated upon. Oligopoly is a market structure where there are a few sellers for a product or a service.
It is the most prevalent form of market organization in which the few sellers might sell homogeneous or differentiated products depending on the type of the industry. Some of the products such as steel are homogeneous while some other products like cigarettes are a part of the differentiated product line in the oligopolistic industry. The action of each firm in the industry affects the other firms. The Sweezy’s kinked demand curve model of oligopoly explains the asymmetry in the response of other firms to one firm’s price change (Peterson & Lewis, 1999).
Since the price competition in the oligopoly market structure can be ruinous, the different firms compete with each other on the basis of non-price competition factors such as product differentiation, advertising and other marketing strategies. The interdependence and the rivalry amongst the firms form the most distinguishing characteristic of the oligopoly market structure. The type of product produced may affect the strategic behavior of the Oligopolists. The cooperative Oligopolists follow the pattern followed by the rival firms unlike the non-cooperative Oligopolists.
Depending on the type of oligopoly and the type of product, each firm tries to make an impact in the existing market structure and have an effect on the rival firms. The tobacco industry follows the model of the cooperative oligopolistic industry with the firms selling differentiated products. The tobacco industry in the US is a tight oligopoly. The market share of the cigarette industry is shared amongst four top companies. The market is dominated by four key manufacturers known as Big Tobacco.
According to a data regarding the market share of the US cigarettes in 2003, the top two firms are Philip Morris and R. J. Reynolds. They own 72 % of the market share while the next two companies Lorillard and British American Tobacco (Brown and Williamson) account for the next 18 %. Apart from the leading cigarette manufacturers other companies such as DIMON and Universal Corporation are involved in selling other tobacco related accouterments. Altadis manufactures 50% of the cigars in the US. With the threat of law suits and the growing limitations on the marketing channels, the industry keeps a tight check on the entry of new entrants, thus maintaining the oligopolistic situation of the industry.
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