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Oligopolistic Nature Of The Tobacco Industry

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Given the oligopolistic nature of the US tobacco product industry, the remaining firms are forced to compete through aggressive marketing and advertising strategies that are subsidized by their high economic profits. A 1976 report for Phillip Morris (now Altria) described the nature of tobacco product pricing as “some sparring among potential price leaders, after which the rest of the industry accepts the resulting price structure” (IARC, 2014). This report offered that a “relative absence of price competition in the market” allowed prices to offer high profits which were then used to support other marketing and advertising activities, which is where cigarette companies were more likely to compete aggressively with one another (IARC, 2014). Tobacco companies have consistently raised prices on their products beyond the various tax increases put on at the state and federal level, passing on this additional cost to the customer (USDA Economic Research Service, 2007). Moreover, the tobacco companies have also acted opportunistically as a group by earning more profits on a per unit basis after the introduction of tobacco taxes. This price increase strategy could be recommended if consumers don’t associate the price increases with profit-seeking from the tobacco companies, but instead associate it with the government (IARC, 2014).
Regarding production and organization of US cigarette companies in the long-term (5+ years), these organizations must consider a variety of factors
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