Until the rash of legal suits and court rulings on the health damage of cigarett

Question

Until the rash of legal suits and court rulings on the health damage of cigarette smoking of last decade, the objective of the firms have been in doubt. Different firms, however, pursued these goals differently.

The doubling of the federal excise tax on each pack of cigarettes on January 1, 1983, as well as the rise in other state taxes since then, resulted in a sharp increase in cigarette prices and a reduction in consumption. In order to lure customers from rivals and maintain profit levels, the weaker three of the nation's six major producers introduced generic cigarettes. These contain cheaper tobacco, come in plain black and white packages, are advertised very little, and sell at less than half the price of name brands. The other three major producers, however, introduced a large number of new brands to appeal to every conceivable taste and spend hundreds of millions of dollars on advertising.

As sales of generic cigarettes rose, other major producers responded with the introduction of discounts- brand-name cigarettes that cost more than generics but less than the traditional brands.

Under the new US federal tobacco law, cigarette companies will no longer be allowed to use words like "light' or "mild" on packages to imply that some cigarettes are safer than others. In 2005, the U.S Justice Department also asked for a $10 billion penalty from tobacco companies to finance a stop-smoking campaign.

Questions

a. What are the objectives of the firms in cigarette industry?

b. Describe demand and supply of cigarette industry as described in the case?

Explanation / Answer

a) The objectives of the firms in cigerette industry are simply to maintain profits whatever way it may come. They will try to do everything possible in their sphere to lure customers and increase their sales by bringing out new varieties with different tastes.

b) In this case, due to introduction of federal taxes on firms, the prices of the cigerette roses sharply. This led to contraction of supply curves. But the major players in the industries came up with new varieties and tastes to lure customers. Some came up with discounted brand name cigerettes. Some came up with generic cigerettes. This all results in sale of cigetettes and thus expansion of demand curve happened and thus the revenues of the firms goes up and thus the profit margins.

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