Prof. Barry Kotlove
7 June 2014
Current Microeconomic Events
Tobbaco Companies in Indonesia
Tobacco industries are categorized as oligopolies. Oligopoly, according to McConnell Brue Flyyn’s textbook, is “characterized by multiple firms, one or more of which will produce a significant portion of industry output.” Tobacco had been present in Indonesia since the 1600s. It was brought in to Java Island by Portuguese merchants. At first, Indonesia’s cigarettes were handmade at home. They were rolled and wrapped with cornhusks, but that was a long time ago. The Indonesian tobacco industry today is characterized by the dominance of big three tobacco companies---Gudang Garam, Bentoel, and Sampoerna. These …show more content…
Negotiating tax is crucial. By pressing down taxes, each company is able to get higher profit. For example, Mozambique implies 10 percent tax on SABMiller’s Impala. Kenya’s government cut off Diageo’s Senator Keg entirely. The “every coin has two sides” idiom fits this ‘cutting off taxes’ act. With low tax given, producers will produce more cheap beers to the market, which leads to higher demand, which also leads to the dangers of drinking beer. On the other side, this very low tax is amazingly favorable for both brewers to keep expanding their market. Their revenue is already billion dollars annually, and it will still increasing.
It is estimated that the beer sale in Africa will continue growing about 4.6% per year. As consumers in North America and Western Europe have started to pay attention to their health and therefore slowly decreasing the rate of drinking, African has started to be blinded by beers. With each African consumer consumes beer about three time’s global average, and low taxation, these clearly attracts beer producer around the world such as North American and European companies. Surely the barrier to entry is not easy to overcome as SABMiller and Diageo have successfully made the market hard to compete and make other parties hesitate to come in.
The beer demand in Africa is almost a perfect elastic demand.