Question

As regular e-cigarettes with nicotine-laced liquid are effectively banned in Japan, the country has become the main market for "heat not burn" (HNB) products. The country accounts for about 60% of the global HNB tobacco market.

The market is dominated by three big firms. Philip Morris (PM), maker of Marlboro cigarettes, was the first to start selling HNB products in Japan in 2014. But it has run into competition from British American Tobacco (BAT) and Japan Tobacco (JT) in recent years.

Q: High profits attract entrants to the fast-growing market. In October, Imperial Tobacco Japan K.K. (ITJ) made a full-scale entry into the domestic HNB market. Explain intuitively how an entry of new firms might affect PM and JT. How would an entry affect the demand facing PM and JT? State the impact on the quantity and profits of each firm

Answer 1

Japan has banned e-cigarettes with nicotine-laced liquid and encouraged heat not burn products and items.Philip Morris(PM)  is the first company to sell HNB items and products.Later British American Tobacco and Japan Tobacco(JT) has entered into the market and gave tough competition to Philip Morris.Due to entrance of new firms into the market the production,sales,profit of Philip Morris has decreased.But the profits of other two companies has literally increased.When existing companies attain high profits,new firms are attracted towards gaining high profits and they enter into the market.

Recently,Imperial Tobacco Japan has entered into Japan HNB market.PM and JT are affected badly due to entry of these firms into the market.Profit rate and demand rate of PM and JT depreciated .As there are many firms and companies which produce HNB products in the market,consumer has got many options and choices to choose.Even if cost of product of one company is high, then consumer tends to opt product of other company.Entry of other firms affected the PM as consumers shifted to more desirable and satisfactory product.Usually every consumer has an excitement to use the new products which are available in the market.Even smokers are excited to use the new HNB products of IJT,after using all the brands then they compare,analyse which product is the best and uses it further.This increases demand for the IJT and demand for PM,JT products is decreased.

If demand decreases,even sales tend to decrease.As PM and JT are facing low demand ,its sales rate has also fallen down.Due to low sales,PM's production rate has decreased to some extent,but the quantity and production rate of Jt has been decreased drastically.The reason for decrease in production rate of Philip Morris only to a certain extent is the company's reliability,reputation.PM has not its production rate as it even exports its products to other countries.Profits of PM are low but the company is attaining profits due sales from old customers and new consumers from Japan and other countries.Japan Tobacco has drastically decreased its production rate due to high competition from PM and ITJ. JT's and British American Tobacco's demand is so low that it reduced the output level and even firm's profit has decreased very badly.But theses companies are still able to sustain due to advertisements, publicity.These companies even have a thought of acquisition with other companies.

Hence,this is how Philips Morris,Japan Tobacco,British American Tobacco are affected and are facing demand,sales and profit issues due to entry of new firms like Imperial Tobacco Japan,etc.