Market Analysis of Philip Morris International
Phillip Morris, an MNC, is a common-name amongst smokers. Since its inception, Phillip Morris and its competitors have seen a constantly evolving market. Early on, when smoking’s negative effects and externalities were not well-known, Phillip Morris and other firms competed heavily to increase revenues in a highly lucrative market. Each firm implemented its own niche methods to achieve this, with one method common amongst all: advertising.
Major tobacco companies invested heavily in advertisements to increase brand awareness and capture a larger market share. Given tobacco’s highly addictive nature, advertisements also played a crucial role in maintaining and expanding market size, by influencing the young and capturing the next generation of repeat customers. This is illustrated in the payoff matrix below, Figure 1, where Phillip Morris’ decision to advertise results in increased revenues due to either a larger market share when competitors choose not to advertise or a larger market/market share when competitors do advertise. As such, the Nash Equilibrium is where both competitors advertise.
However in 1971, the US government introduced a ban on cigarette TV advertisements, reshaping the tobacco industry landscape. As such, major players such as Philip Morris were forced out of the Nash Equilibrium. Whilst a ban on advertising would normally have an immediate adverse effect on profits, the short-run impact within the tobacco industry was vastly different. Given tobacco’s addictive nature and the short-term advertising inelasticity of cigarettes (0.03–0.05) [1], the impact on demand was minimal. Hence, the reduction in advertising costs outweighed the fall in revenues resulting in a short-term increase in profits. However, in the long run, demand fell as the ban on TV advertising paired with the impact of health-awareness campaigns drastically limited the entry of the new ‘younger-generation’ [2] as illustrated in Figure 2.
As such, the intended ‘immediate effect’ of the ban on cigarette advertising was not realised [3]; the overall effect took place decades later with teenage smoking decreasing to less than 5%. To circumvent this, firms like Phillip Morris were required to innovate to develop a new way to capture the next generation of smokers. The development of e-cigarettes, such as IQOS, has allowed Philip Morris and its competitors to enter a new unregulated market for nicotine based products. This market currently resembles the cigarette market prior to the 1971 advertising ban, with television advertising shifting to mass advertising on social media platforms. The industry has used novel products to capture new consumers as over 28% of high school students currently use these products [4]. Furthermore, of the non-smokers that use these products, over 30% usually begin smoking cigarettes within six months [5]. Thus, whilst legislation has been able to reduce long-term demand in an attempt to minimise the social and health negative externalities of tobacco based products, the industry has adapted and is once again developing the future generation of smokers.
The tobacco industry is one that has seen a lot of change. Early on, firms stuck to ‘conventional’ marketing methods to lure in customers, but as regulations tightened and awareness increased, the conventional tobacco industry faltered. Phillip Morris and its competitors counter-acted by releasing, in essence, a ‘newer, slightly modified cigarette’ utilising ‘newer, slightly modified advertising’ methods. This gives rise to the question: what is the government’s next plan of action? Would it be to introduce another ban? Governments are currently moving in that direction. However based on past events, the short-term impact is minimal, and in the long run the industry will find a ‘new’ product to circumvent regulation. Concentrating on effectively educating the public on the effects and externalities of smoking could serve as a better long term solution to halt the cyclical nature of a product range that contributes to 16% of all deaths in the UK.
References
[1] Hamilton, J. (1972). The Demand for Cigarettes: Advertising, the Health Scare, and the Cigarette Advertising Ban. The Review of Economics and Statistics, 54(4), 401–411. doi:10.2307/1924567
[2] Best, A. (2019). This is the end of tobacco advertising. [Online] Cancer Research UK — Science blog. Available at: https://scienceblog.cancerresearchuk.org/2017/05/19/this-is-the-end-of-tobacco-advertising/ [Accessed 28 Nov. 2019].
[3] Who.int, 2019. [Online]. Available: https://www.who.int/tobacco/media/en/TobaccoExplained.pdf. [Accessed: 28- Nov- 2019].
[4] A. LaVito, “CDC says teen vaping surges to more than 1 in 4 high school students”, CNBC, 2019. [Online]. Available: https://www.cnbc.com/2019/09/12/cdc-says-teen-vaping-surges-to-more-than-1-in-4-high-school-students.html. [Accessed: 28- Nov- 2019].
[5] “Teens using e-cigarettes may be more likely to start smoking tobacco”, Drugabuse.gov, 2019. [Online]. Available: https://www.drugabuse.gov/news-events/news-releases/2015/08/teens-using-e-cigarettes-may-be-more-likely-to-start-smoking-tobacco. [Accessed: 28- Nov- 2019].
