The economics of the tobacco products manufacturing industry are examined in this chapter. The findings of this examination are presented in discussions of (1) market structure and competitiveness, (2) barriers to competition, and (3) the elasticity of demand.
The competitive characteristics of a market are closely associated with market structure. Market structure refers to the character of competition within a product market. Variations in the level of competition occur along a continuum ranging from pure monopoly (highly concentrated markets) at one terminus to pure competition (competitive markets with low concentration) at the polar extreme. Market structure also may be defined within the contexts of (1) the numbers of firms and buyers, (2) product substitution, and (3) barriers to entry and exit.
A widely accepted concept that is under scrutiny in the contemporary period is that the resources and competencies of wealth-creating institutions are largely independent of each other, and that individual enterprises are best able to advance their economic objectives, and those of society, by competition, rather than by cooperation. While this concept has been actively challenged in the 1990s for the first time in decades, noted economic theorists in the past, such as Cournot in 1851, acknowledged that the behavior of firms may be influenced by the actions of their competitors. Marshall, in 1920, recognized that the clustering of firms with related interests might yield agglomerative economies and an industrial environment, external to individual firms, but internal to the industry. The chummy cooperativeness among the larger American tobacco products manufacturing companies appears to challenge the independence argument.
The theory underlying the market structure-performance approach to industry ability is that (1) profitability, as a measure of performance, (2) is a correlate of the degree of concentration within the...