The Microeconomics of British American Tobaco in Malaysia

British American Tabaco by syed hafiy

 

History and Background

One of the most known and biggest cigarettes company in Malaysia is The British American Tabaco (BAT) Company. The company is the joint venture of Rothmans of Pall Mall (Malaysia) Berhad and the Malaysian Tobacco Company Berhad on 3 November 1999(www.batmalaysia.com, 2013). The company both share all their knowledge, experience, talent and unrivalled portfolio of the highest international brands to create one of the biggest Tabaco Company in Malaysia. Now the company has become one the biggest Tabaco Company in Malaysia due to they are the market leader of Tabaco in Malaysia and are also listed in the top 25 in bursa Malaysia. The company is produce and sell the best and the highest quality tobacco brands and follows the Malaysian consumer preference. The cigarettes that are produce by B.A.T Sdn Bhd are such as Dunhill, Kent and Pall Mall. (www.batmalaysia.com, 2013)

The determinants of demand for Tabaco in Malaysia

There only 2 determinants of demand in Malaysia and that are the preference and population of people who smokes in Malaysia. Preference meaning that people with the same income have different type of demand depending on their preference (John Sloman, 2012). For example most women in Malaysia prefer to smoke minty type of cigarettes such as the Dunhill mint rather than the normal ones. While in the other hand there a lot of smokers in Malaysia that demand a lot of cigarettes. This because heavy smoker will smoke more than a packet a day and regular smoker will smoke less than a packet a day (John Sloman, 2012).

Elasticity of demand and the effect of tax on cigarettes.

Cirgarettes are considered as consumer goods due to the demand of it. Consumer goods are produce so that they can satisfy the human needs and wants (John Sloman, 2012). Cigarettes are considered as human wants rather than a need although they are some people smoke a packet every day and claim that they cannot live without cigarettes. This is because human can live life without cigarettes if they wanted to. (John Sloman, 2012)

 

 

The price of cigarettes in Malaysia depends on the tax that has been implemented on the cigarettes by the government of Malaysia. This is because cigarettes are considered as demerit goods and by giving tax is the only way that the government can lessen the smoking habit in Malaysia (www.themalaysianinsider.com , 2013). The demand of cigarettes will just change a bit even if there is an increase in price, this is due to that even though that the price of cigarettes increase such as in the graph Dunhill was sold in 2012 is at RM10.50 in and the demand was 80 pack and now in 2013 it is sold RM12.50 and the demand is 90, even though the price is increase people will still buy cigarettes and only a few amount of people will stop buying (www.consumer.org.my, 2013) This shows that the demand of cigarettes is inelastic as shown in the graph and the implementation of tax to cigarettes only lessens a few smokers. There are also no substitutes of cigarettes but there is a complement to it. (Sandra L. Decker, 2013) said that alcohol is the complements of cigarettes due to a lot of people like to drink and smoke.

In the year of 2004 BAT contribute a large amount of RM1.8 billion in indirect taxes and RM683 million in corporate taxes (www.batmalaysia.com, 2013). Indirect taxes from the tobacco industry represent 7.8% of the Malaysian Government's total indirect tax revenue while approximately 3% of the Malaysian Government's income tax revenue is derived from corporate taxes within the tobacco industry (www.batmalaysia.com, 2013)

Price Floor of cigarettes

 

 

Cigarettes have a price floor that has been set by the government of Malaysia. The price floor is implemented so that more people will stop smoking in Malaysia. According to Rahman (2012), Malaysian government spends 20 billion Malaysian ringgit on treating the chronic disease, ischemic heart disease and lung cancer that the smokers can get from long or short term smoking. This means that if there is a reduction in smoking, it will help in reducing government expenditure in health-care for the smokers or any related smoking diseases.  When the price floor are set people will either stop buying cigarettes, change to a cheaper brand or illegally buying a cigarettes which will involve the black market, but there are still people buy cigarettes due to it’s a necessities to some of them (John Sloman, 2012).

Black Market of cigarettes

Black market is and illegal market that operates alongside a legal market in which a price floor or other restriction has been imposed. The price of cigarettes that are sold in the black market are cheaper than the normal market are selling (John Sloman, 2012). About 4 out of 10 packets of cigarettes are illegally sold in Malaysia. This will cause smoker to smoke even more hence failure of the government to reduce smokers in the country. Other than that the government also lose 2 billion ringgit Malaysia annually due to the illegal trade of cigarettes in the country. Now the government has implemented a rule that there will punishment of RM 10,000 or 2 years prison for whomever buy an illegal cigarettes. Illegal cigarettes are usually sold without the picture of impact of cigarettes or the Malaysian logo such as the picture on the side (www.TheStar.com.my, 2013).

Oligopoly

Oligopolies are price setters as opposed to price takers. A group of firms that gets together (collude) and makes price and output decisions to maximize joint profits is called a cartel. Each firm faces a downward sloping demand curve for its product (John Sloman, 2012). BAT is an oligopolistic industry because it controls most of the Tabaco production in Malaysia (www.TheStar.com.my, 2012). This because in Malaysia, tobaccos are an oligopolistic industry and are controlled by the three big companies that are very well known such as – British American Tobacco (M) Bhd (BAT) the well-known brand is Dunhill, JT International Bhd for producing Winston (JTI) and Philip Morris for the production of Marlboro (www.TheStar.com.my, 2012). The three big companies also create barriers to entry so that no other Tabaco company will able to open easily in Malaysia. This is due to they are very competitive among each other and controls all the flow of production of most sold cigarettes and also they don’t want add any more potential rival in the industries’ (John Sloman, 2012).

Long run

Long run production is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, where in the short run firms are only able to influence prices through adjustments made to production levels (www.investopedia.com, 2013) .So this means BAT is the long run production because it process one of the most top selling cigarettes brands which is Dunhill, this is because the capital creating a various type of Dunhill cigarettes cost a lot of money, such as the Dunhill light, Dunhill mint, filter and many other type requires research to that satisfy the needs of the costumer whether they like the cigarettes or not and this research requires a lot of capital depending on the country they trying to market on. However the decision on type of cigarettes produce are solely depending on the type of smoker and the area that they are in (www.batmalaysia.com, 2013).

Conclusion

To conclude BAT is the leading brand of cigarettes manufacturing company because they are oligopolistic industries’ due to they set the price of the cigarettes sold in Malaysia. This means there are no other new company that wan to produce cigarettes will not able to due to they are the strongest market leaders of producing tobacco.

Reference list

British American Tobacco Malaysia(2012)The illegal cigarette trade in

Malaysia .[online]. Available from: http://www.batmalaysia.com/group/sites/BAT_7RYJ8N.nsf/vwPagesWebLive/DO8PBFAV?opendocument&SKN=1 [Accessed 6Januari 2014].

British American Tobacco Malaysia(2012) About us

http://www.batmalaysia.com/group/sites/BAT_7RYJ8N.nsf/vwPagesWebLive/DO7SUK8D?opendocument&SKN=11 [Accessed 6Januari 2014].

Investopedia(2012) Definition of long run.

http://www.investopedia.com/terms/l/longrun.asp1 [Accessed 6Januari 2014].

TheStar(2012) Cigarettes Black Market

http://www.thestar.com.my/story.aspx/?file=%2f2010%2f6%2f1%2fbusiness%2f6375529&sec=business [Accessed 4Januari 2014].

Sloman, J, Wride, A and Garratt, D, “Economics”, Eighth Edition Global, Pearson, 2012.