The Case of Romanian Cigarette Market

Topics: Tax, Supply and demand, Marketing Pages: 27 (10238 words) Published: February 26, 2012


1. Introduction Among the obligations assumed by Romania by(1) the EU Adhesion Treaty (2)there is the fact that, until 2010, the minimum tax level for cigarettes must be aligned with the minimum tax level of the member states – 57% of the most popular cigarettes’ (MPPC) price, but not less than 64 Euros for 1000 cigarettes. Through the modifications made to the Fiscal Code in April 2006 by the OU 33/2006 the government approved the tax level, which will increase gradually until it reaches the required level. (In 2006, this happened two times, at an approximately two month’s interval). According to the decision, the tax of the cigarettes will be calculated by means of a fixed quota and another quota computed from a percentage of the cigarettes’ value. The first increase stipulated that the tobacco tax should be of 9.10 Euros for 1000 pieces plus 30% of the maximum price of retail selling (a medium tax of 32.13 Euros for 1000 cigarettes), which produced an increase of approx. 0.8 RON in the price of a cigarette package. Starting with the 1st of July, the tobacco tax jumped to 16.28 Euros/1000 pieces plus 29%. The 177 article of the Fiscal Code was as well modified: for cigarettes the taxes due to equal the sum of the specific and ad valorem taxes, but not less than 19.92 Euros/1000 cigarettes. When this sum is less than the minimum taxes, they are paid. The tobacco industry companies solicited a five year transition (however obtaining only three), in order for the tax level to reach 64 Euros in 2012. They claim that this period is necessary because the medium income in Romania is half the one of the other candidate states, and consumers can’t afford the increase in price. This statement is justified, even if it’s about tobacco, which is harmful for health. The Romanian tobacco market amounts almost 1 billion Euros, with a total volume of 35 billion cigarettes, and is dominated by three large international producers, Philip Morris, British American Tobacco, and Japan Tobacco International, who dominate almost 90% of the market share. The remaining 10% is controlled by other producers or importers (a competitive cluster, because these firms have low market shares), making the market look like an asymmetrical oligopoly. 94

The paper analyses from the point of legislative and economic perspective the impact of the measures taken by the Romanian government in order to comply with EU requirement and their impact on the Romanian competition market.

2. Case analysis from the perspective of the Competition Law The tax increase has a significant impact on the entire industry, but the ones who are most affected are the poor quality cigarettes, the best sold brands, whose prices will get closer to the ones of the superior quality cigarettes. As a consequence of the actions of the central administration, the premises for an unfair competition are shaped by favourizing certain producers (discrimination). Under these circumstances, the minimum taxes computed for 1000 low cost cigarettes amount to approx. 17 Euros. The producer won’t pay only this amount, since there are also obliged to pay the minimum value of 19.92 Euros established by the government. As a result of setting a minimum tax level and a process of taxation, the taxes applied to filter cigarettes are approx. 65% of their price, while the ones applied to cigarettes without filter are 90-95% of their price. This measure negatively influences in particular the activity of the firms with low prices (most of which are, ironically, Romanian!), indirectly pursuing their elimination from the market. This way, discriminatory conditions are created for economic agents operating in this market. The prices of all cigarettes will increase, but the increase won’t be proportional with the price, because the prices will increase more in the inferior segments than in the superior ones. The direct effect to this...
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