Economics of Plain Packing of Cigarettes - Essay Example

? Health Economics Contents Contents 2 Introduction 3 Plain Packaging of Cigarettes 3 Economics of Plain Packing of Cigarettes 4 Company’s Perspective 6 Advertisement of the Brands 8 Effectiveness of Plain Packaging as a policy 8 Prospects of introduction of the policy in a country 10 Conclusion 11 References 12 Introduction Smoking of cigarettes has always been injurious to health. In most of the societies in the world it is considered to be having ill effects on the health as well as the environment and thus people are asked to avoid smoking as much as possible. Several countries have made attempts to reduce the number of smokers. The plain packaging of cigarettes is another attempt to reduce the number of smokers. Plain Packaging of Cigarettes The plain packaging of this tobacco product is alternatively known as homogenous or generic packaging. The standardised packaging system of this form involves removal of all the lustre out of the presentation of the product. The branding for the cigarettes which is expressed mostly through the colours, the logos and the trademarks needs to be removed from the pack of cigarettes that finally reach the customer. The packaging should be done with a plain brown cover with the name of the brand printed in a uniform style in a predetermined size. Thus there is very little flexibility on part of the companies in presenting the products to the end users. Along with that the packs also contain mandated information about the ill effects of the product and the legal disclosures like the tax stamps. This concept of plain packaging had been proposed in countries like New Zealand, Canada and Australia since the end of 1980s (Voon, Mitchell, and Liberman, 2012, p. 12). These attempts were taken with the main motive of reducing the amount of consumption of tobacco in the countries. There have been various researches done during these years to determine the outcome of the introduction of plain packaging of tobacco products. Australia being the pioneer of this concept was the first country to introduce the concept (Shanahan and Elliott, 2009, p. 182). The removal of the branding removes the attractiveness of the product and therefore discourages the smokers to consume the product. Thus the removal of branding has an effect that a taxation of product would have on the product. Economics of Plain Packing of Cigarettes For any normal good, the change in the price of the product will have an effect on the quantity of the product consumed. When the prices increase people would consume less of that product. This is however not true in case of products which are addictive in nature. Even through the prices increase the quantity of the products consumed would not decrease. Thus the price elasticity of demand for the products would be zero. The economics of the plain packaging has been explained with the help of the following graphs. The demand for cigarettes would be an inelastic demand curve (Tucker, 2010, p. 140). This is because even though the prices of the cigarettes change the demand would remain more or less constant this is because people generally get addicted to tobacco and they cannot control the amount that they consume even on the increase of the price (Baumol and Blinder, 2009, p. 108). That means the smokers are insensitive to price changes. In the left panel of the graph the demand and supply curves have been drawn. (Perloff, 2011, p. 33) Now on the introduction of the plain packaging of the cigarettes the product will lose its appeal to the prospective smokers. As a result the smokers would be demanding less amount of cigarette. Therefore there would be a shift in the demand curve for cigarettes. In other words the number of smokers would reduce. However, the demand curve would remain inelastic because this reduction in demand would not be as result of the change in the prices but the reduction in the level of desire of the consumers to smoke. The demand for this product would remain restricted to those people who are addicted to smoking. Thus even if the supply curve for the cigarettes is shifted there will be hardly any effect on the quantity demanded of the product (Frank, 2010, p. 393). The price will only increase or decrease without having any radical effect on the tobacco consumption of the smokers. This has been shown with the help of the following figure. (Perloff, 2011, p. 34) On the reduction in the supply of the cigarettes the supply curve shifts to the left. There is very little change in the quantity of demand because of this. The demand curve remains in elastic. Thus the price is seen to move up which has no effect on the demand (Besanko and Braeutigam, 2010, p. 151). Therefore any attempt on part of the government to discourage the smokers by increasing the price would turn out to be completely ineffective. This is because the smokers are not price sensitive in case of tobacco products. From the point of view of the consumer therefore the introduction of plain packaging would have a favourable effect by reducing the demand for the product. This system would be an acceptable strategy for the society to reduce the consumption of cigarettes. Company’s Perspective Most of the companies producing cigarettes generate their entire revenue from the sales of this tobacco product. The increase in the demand for tobacco among the consumers would give rise to a rising sale for the tobacco product. However, if the consumer demands decreases the sales of cigarettes would go down and the tobacco companies would incur a loss (Farrelly, Pechacek and Chaloupka, 2003, p. 844). Therefore, despite the statutory disclosures and the mandatory warnings the firms producing cigarettes would want the consumers to demand more of the product. Introduction of the plain packaging would hurt the companies by reducing the demand for the product. This is a moral suasion method in which the smokers are discouraged to do the work. Most of the tobacco companies would oppose to this way of packaging due to a host of reasons. The main reasons behind this include the absence of the brand equity in the packets of the cigarettes. A particular brand of cigarette might be preferred by a consumer. The style of the pack, the logo and the colour may be the reason why a person would opt for a particular brand. Sometimes the young people prefer a particular brand of cigarette especially for the way the brand appeals to the peers. If these features essential to a brand are absent then no individual would feel the necessity to buy any particular brand. The process of standardisation would bring all the brands in one place which would result in the reduction of the preference of one brand to the other. Thus the brand which bank mainly upon the brand equity would slowly start losing the market share. Homogeneity would prevail in the products and there would be uniform market for all the brands. Along with this the companies that produce cigarettes would be facing a reduction in the cost of production. This is mainly because the cost that the companies used to incur on advertisement expenditures would get reduced. The introduction of plain packet would not require any cost of designing of the logo or the expenses to make a package that would be acceptable to the consumer. The practice of astroturfing would not be acceptable to the producers of the cigarettes because in order to promote a brand and increase the purchase of the product the marketers of the brand have to incur a lot of costs. This method would change the perception of the smokers and they would gradually reduce the consumption of tobacco. Advertisement of the Brands Advertisement is a process by which the marketers communicate with the prospective consumers. If the advertisement is effective then the consumers would be buying more of the product. The tobacco brands advertise their product through the designing of the packs. Therefore packaging is a major tool through which the companies communicate with their customers. If the packaging cannot be done as per the wish of the companies and it has to remain restricted to the format that the regulatory body provides to the customers, there would not be enough place the companies would be able to promoted their product. However the tobacco companies have argued that due to the small size of the packets of the cigarettes, the package would not be able to promote the use of the product. The pack merely acts as a form of reminder to the consumer about the brand and the price of the product. Thus the interpretation of a packet of cigarettes as a form of advertisement is not acceptable to the tobacco companies. According to them the tobacco companies have imposed a ban on the other from of advertisement through mass media. This is another step forward to arrest the consumption of tobacco. Effectiveness of Plain Packaging as a policy In a survey conducted by the BBC it was found out that most people thought that the removal of the designing of the tobacco products would have least effect on the consumption of cigarettes by the smokers. The introduction of the ban in the packaging would have least effect on the rate of smokers in a particular country. Most of the policies that have been introduced to reduce the desired amount of smokers have failed to reduce the rate of smoking. The survey proved to be failure because the people who had responded to the survey also included people who were non smokers and the smokers who responded did so quite disapprovingly. Thus the real world conditions moved away from the findings of the survey. The proponents of the plain packaging were of the view that the mandatory warnings that are present in form of the graphic representations would induce the smokers to reduce their consumption of tobacco. However, it has been noticed that the images are positioned at the back of the package of cigarettes which is often ignored by the smokers. Along with this the captions that were written on the cover of the packages were direct messages rather than indirectly taking about the harmful effects of tobacco. The major part of the area of the cover has been occupied by the warnings and the images of diseases which would discourage the smokers to consume tobacco. The entities that have been promoting against smoking as a habit have always been trying to increase the warnings and incorporating signals for discouraging the smokers through a different kind of representation of the packet. Due to increase in the size of the warning labels these mandatory outcomes have been even more noticeable by the people who would come in contact with a pack of cigarettes. Canada is the pioneer in the introduction of warning through the incorporation of picture of the patients having adverse effects on their health on the pack of cigarettes. However, there was very little difference in terms of reduction in the level of consumption of the tobacco product. Similar situation was witnessed in Britain where the pictures touched the smokers emotionally but had negligible impact in terms of the rate of quitting (McGuinness and Cowlin, 1975, p. 313). There is a wide difference between the linguistic and graphical warnings. The traditional ones acted as mere information to the smoker leaving the decision of quitting at the discretion of the individuals. On the other hand the graphic representation had the motive of discouraging the smokers by creating a disturbing sensation in the minds of the smokers. Prospects of introduction of the policy in a country A few countries that have implemented this policy of plain packaging cannot account for the success of this strategy because the net effect on the smokers is not significant enough. Only half a percent of the people who smoke in Britain have quit smoking due to the introduction of plain packaging. The groups that promote non-smoking practices claim that the people that they target through this policy are not the ones who are in a continuous habit of smoking but the ones who have just started it and are not yet addicted. Thus it would mainly target the younger population who are out of school and get addicted mainly due to peer pressure. However, many of the advocates also claim that it would have the least impact on the existing smokers (Gospodinov and Irvine, 2004, p. 5). The approach of this policy is somewhat different. If the younger people are stopped from smoking habits then with time the older smoking population would phase out and the conversion of non smokers to smokers can be stopped. This would take a longer span of time and would benefit the society in the long run. Thus the age old symbols of Silk Cut, Regal or Marlboro would have no impact on the generation to come unlike the way these brands appealed to their fathers’ generation. The children would be visualising the package of cigarettes from a negative point of view rather than something to brag about. Thus the companies that produce tobacco products would not be able to create any interest on the young minds about the product. The companies than have to make use of the nicotine contained in the tobacco for alternative medical uses like for the manufacture of medicine or preparation of repellent that can be useful for the cultivation purpose. Therefore the introduction of the new style of packaging would make the non-smoker to decide whether he would continue smoking or not. Research has shown that the smokers who regularly come across the packages of the cigarettes are not being able to recall the messages that have been written on the cover of the cigarette packs. This shows the ineffectiveness of the policy on the present smokers in a particular country. It has also been proved that the mandatory disclosures do not have any effect on the rate of quitting of smoking. However, the people who lobby against smoking are correct on one point. The messages that are provided through the various kinds of packaging only enumerate a fact that the smokers already know. The smoking population consume tobacco knowing well what consequences it would have on their health. Various surveys have shown that the level of awareness among the target audience regarding the consequences have remained more or less same in the prior as well as post introduction period of plain packaging. Though the people continuously observe the warnings they do not quit because they are not aware that the ill effects rise with time. Conclusion The government along with the introduction of such policies should ensure that illegal trading practices do not take place in the country. If the companies are unable to communicate with the consumers through branding they would take a cost advantage strategy and would be offering the product at much lower prices. Thus the price differentiation strategy would prevail in the market. The brands that charge a premium price for the brand image would lose their market share and a lot of new entrants would enter the market because of the low cost of promotion or branding expenses. Smoking is a societal problem and thus the approach should be done from a societal point of view. Reducing the areas for smoking and putting a ban on smoking public places would be a better way to tackle the problem rather than adopting ways which are voluntary to the smokers. References Shanahan, P. and Elliott, D., 2009. Evaluation of the Effectiveness of the Graphic Health Warnings on Tobacco Product Packaging 2008. Australian Government: Department of Health and Ageing. Frank, R. H., 2010. Microeconomics and Behavior. New York: McGraw-Hill/ Irwin. Gospodinov, N. and Irvine, I. J., 2004. Global health warnings on tobacco packaging: Evidence from the Canadian experiment. Topics in Economic Analysis & Policy. Vol. 4 (1) 30. Tucker, I.B., 2010. Microeconomics for Today. Mason: Cengage Learning. McGuinness, T. and Cowlin, K., 1975. Advertising and the Aggregate Demand for Cigarettes. European Economic Review. Vol. 6. Farrelly, M., Pechacek, T. and Chaloupka, F., 2003. The Impact of Tobacco Control Program Expenditures on Aggregate Cigarette Sales: 1981-2000. Journal of Health Economics. Vol. 22. Baumol, W. J. and Blinder, A. S., 2009. Microeconomics: Principles and Policy. Mason: South Western Cengage Learning. Perloff, J. M., 2011. Microeconomics. London: Pearson Education. Besanko, D. and Braeutigam, R., 2010. Microeconomics. New Jersey: John Wiley & Sons. Voon, T., Mitchell, A.D. and Liberman, J., 2012. Public Health and Plain Packaging of Cigarettes: Legal Issues. Massachusetts: Edward Elgar Publishing. Read More