Philip Morris International.

The economic studies of Philip Morris International.

The company that is being study is Philip Morris International. Philip Morris International is a categorizing tobacco industry and well known as one of the largest leading tobacco company. Initially, the founder, Philip Morris started a single shop, which supply tobacco and the final production of cigarette in London’s Bond Street back in the year 1847(Philip Morris International, 2013). After 55 years of hassle and hard work, Philip Morris in Australia is the first official to be involved with outside of the United State (Philip Morris International, 2013).Philip Morris main headquarter located in Richmond, VA. Philip Morris International is a company whom not only produce one brand, but several such as the Marlboro, L&M, Parliament and many other different kinds of brands. These cigarettes were normal good. However, as taxes gradually rise each year, it has turned into luxury. Today, Philip Morris International has more than 87,000 employees and 53 manufacturing facilities (Philip Morris International, 2013).

Philip Morris International is a classifying oligopoly structure. Oligopoly structure is often confused with monopoly structure as both structures dominate in a large market. To be precise, oligopoly is a situation where few firms control a market. Hence, as long as the demand is there, price can be control by the firm because some customers may have built loyalty relationship with the firm. Philip Morris International is categorizing oligopolistic company because seven out of fifteen top international brands are belonging to Philip Morris International (Philip Morris International, 2013). Moreover, for example in America, Philip Morris dominates half of the country’s retail cigarette market (Yahoo Finance, 2013). Since there are few great competitors, there exist of barriers of entry and exits. In tobacco industry, barriers of entry main problems are government restrictions on advertising, taxation and marketing. In addition, the producers must have strong capital in order to secure their existing resources, which last for two years supply (Pedino, 2009). In fact, producers have to bear in mind that consumers do not change fast on their existing taste preference product (Pedino, 2009).

Commonly, when a price of a products increases, the demand of the product will eventually decreases as well. However, in the case of a cigarette, it does not go well with this concept. Economic introduces this term as a relatively inelastic product. Elasticity can be a term of determinants whereby it determines the responsiveness of the demand quantity of a good when a change in price is made. In another words, these related companies has pricing power into its product. Having said that, nicotine is an addiction with no substitutions that causes inelasticity whereas elastic means consumers still has the choice to pick their preferences brand with nicotine in it.

                                                                          Diagram 1

Based on diagram 1, it is clearly understand that cigarettes are relatively inelastic as when a price rises from P2 to P1, the quantities only fall by a small amount Q3 to Q2 whereas when in comparison with iphones, there is a huge effect on the quantity demanded when price P2 rises to P1. This is because consumers has fall back to purchase other devices like Samsung, HTC, LG, and so on. Moreover, since, Philip Morris International products are relatively inelastic, hence buyers will have to share the burden of tax with the suppliers but buyers still pay more. Philip Morris International faces a minor loss of 10.8%/195.3 billion units in Japan when excise tax implemented on October 2010 to increase the price and causes the market to reduce (Philip Morris International, 2012).

In terms of government interventions, it strongly interfere the firm’s decisions and intention. When a price floor has imposed above the equilibrium market price, it has powerful effects to the economy but government can discourage more consumers to reduce on smoking consumption. However, it may reduce the firm’s profits as price goes up, quantity demanded will eventually fall. Not to mention, price floor sets above the equilibrium price will cause the firm to have excess of amount of surplus or also known as overproduction and a dead weight loss occurs. According to ITC Malaysia National Report, cigarette has minimum price and price promotion is not allow (International Tobacco Control, 2012). When the price of the cigarettes rises, black market arises as well. People will seek for lower price from the smuggling community.

As mentioned earlier, since Philip Morris International is an oligopoly structure, it will therefore have few strong competitors such as British American Tobacco PLC, Altria Group Inc, Imperial Tobacco Group PLC, and Lorillards Inc. With these existing companies, it could have an adverse effect on the firm when Philip Morris International decides to change its price, as result consumers will seek substitutions to other companies with cheaper price.

Despites Philip Morris International is a well-established company, it still have to deal with opportunity cost. As stated in Philip Morris International annual report, it subsidizes the employee by providing pensions, postretirement health care, and postemployment benefit. These benefits are to handle the employees’ wealth fare and to reduce the turnover rates (Philip Morris International, 2012). With this in mind, Philip Morris International has invested their money on employees’ maintenance instead of expanding their business growth.

                                                                            Diagram 2

Based on diagram 2, economy shows that as firms increase their output from Q1 to Q2, average cost will also fall from AC1 to AC2. Economy of scale of production in Philip Morris International is efficient because it utilizes its relationship between the quantity produced and fixed cost. For example, Philip Morris International produced a massive numbers of cigarettes and the more he produces, the lower the per-unit fix cost. This is because the fixed costs are being shared by the large quantity of goods. Besides its quantity productions, Philip Morris international has also minimizes its cost on printing by encouraging all visitors and shareholders to utilize fully their online resources. Furthermore, Philip Morris International organizes and designs their manufacturing structure to able deliver system-wide flexibility so that the firm can maximize the revenue. 

                                                                     Diagram 3

As seen in diagram 3, Philip Morris International has stand out between the both greatest competitors who is British American Tobacco and Japan Tobacco International. Its signature Marlboro brand is the highest demand in the year 2007. Philip Morris International product sale gradually increase may be the determinants of income. Generally, it is clearly know that most elderly people are the willing to pay consumer because of their high income from working experience. As income grew bigger, demand towards cigarette will increase as well while there will be a rightward shift in demand curve. Besides that, the consumers have adapted their preference taste towards Philip Morris International’s products. Not forgetting, when government announces an increase in price due to the tax will result the demand to significantly rise because consumers has expected the future price.

Philip Morris International is best in the state of long run production as one of the factors is adapting consumer’s addictiveness in a long response. In addition, in the long run, the firm can still increase or decrease their production quantities when the firm expected in profit or loss. Also, when the firm has planned to expand another plant, the firm has to decide on the suitable technology to maximize their profit. While in the short run, costs are fixed from the existing plant size.

In conclusion, it is not surprised to see Philip Morris International to be one of the top tobacco industry revenues earners as it has great utilization of resources. Philip Morris International will continue to expand their business growth and to attract more share buyers. I belief that Philip Morris International should also consider in forming collusion with British American Tobacco although Philip Morris has once denied any collusion with R. J. Reynolds Tobacco Company (Fisher.D, 2009). To a certain extent, Philip Morris International may face the law of diminishing of returns whereby as one input increase, output will increase but in a decreasing rate. For example, supposed ten workers could pack 150 boxes of cigarettes per hour, and people might assume twenty workers would give additional output of 150 boxes of cigarettes. However, the assumption is wrong because workers might face scarcity in lack of space that will result productivity to decline. Therefore, Philip Morris International should examine every decisions and actions in order to maintain their rank among other competitors.

  

  

   

Reference List

1)Fisher.D (2009) SC agriculture commissioner blasts buyers. Available from: http://news.google.com/newspapers?nid=266&dat=19920806&id=wfErAAAAIBAJ&sjid=1GkFAAAAIBAJ&pg=2675,3355505 [Accessed 20 October 2013]

2)International Tobacco Control (2012) ITC Malaysia National Report March 2012. Available from: http://www.mysihat.gov.my/v2/promosi/images/stories/pusatmaklumat/itcreport.pdf [Accessed 20 October 2013]

3)Pefindo (2009) Cigarette Industry. Available from: http://new.pefindo.com/files/id_cigarette_200904.pdf [Accessed 20 October 2013]

4)Philip Morris International (2012) 2012 annual report. New York: Philip Morris International.

5)Philip Morris International (2013) Our Brands. Available from: http://www.pmi.com/eng/our_products/pages/our_brands.aspx [Accessed 20 October 2013]

6)Philip Morris International (2013) Our History. Available from: http://www.pmi.com/eng/about_us/pages/our_history.aspx [Accessed 20 October 2013]

7)Yahoo Finance (2013) Philip Morris USA Inc. Company Profile. Available from: http://biz.yahoo.com/ic/55/55933.html [Accessed 20 October 2013]