The object of this research is to estimate the economic impact by Kentucky Tobacco Settlement Trust investments in the wine industry, including market structure and pricing. Research methodology is used by the five competitor forces model by Michael E. Porter.
In the last decade, tobacco has been one of the most beneficial crops in Kentucky, the second-largest place where 82% of all tobacco is grown (Brown, May). It has become a majority crop for farmers. However, a number of factors, such as health concerns, have contributed changes in the tobacco industry. The anti-smoking campaigns and the National Tobacco Growers Settlement Trust were created to reduce the production and sales in tobacco by correcting funds from four big tobacco companies. According to the article posted by Al Cross (2006) in University of Kentucky School of Journalism and Telecommunications web site, “The $206 million invested so far in Kentucky agriculture has helped shake farmers’ historic allegiance to tobacco, encouraged diversification and upgraded the state’s cattle industry, the largest in the Eastern U.S.” This means the payment from the trust is made directly to improve other Kentucky industries, including wine. However, in order to finance this settlement, those companies have to increase their price to lower the demand of smokers. Under this condition, unfortunately, 60 wineries in Kentucky have to face the budget cut problem. Background
Looking at Kentucky wine market feasibility assessment (2002), Kentucky’s wine industry began in 1798 at Jessamine Country by Jean Jacques Dufour. The state had become viticulturally successful. However, following the Prohibition in 1920, Kentucky’s wine industry had replaced by other crops and was out of business. In the same research, there are currently about 150 wine grape growers in Kentucky cultivating 215.3 acres of vineyards; 47% of it is planted to visit vinifera varietals. The average price per ton was $1009 in 2001, and today Kentucky’s wine industry is growing up and expected to grow more in the future. Market Structure and Pricing:
What economic market structure does the industry most closely resemble? Market structure is defined the relationship as the organizational and other characteristics of a market (Geoff Riley, Sep2006), it shows the number of firms producing similar prosucts. According to the website: Business Dictionary.com, There are four basic types of market structure: 1.
Perfect competition: A lot of buyers and sellers in the market, none being able to influence prices. 2.
Oligopoly: A market dominated by a small number of sellers, these large sellers who have some control over the prices. 3.
Monopoly: A market has only one seller, single seller with considerable control over supply and prices. 4.
Monopsony: single buyer with considerable control over demand and prices. The market structure in Wine industry is very similar like the Beverage industry. Beverage market has a lot of suppliers and brands. Customers can select their favorite brands according to their preferences. New varieties and new brands are increasing every month in the market, the growth of consumer demand is increasing, the size of the market is increasing too. After years of competition and development, the wine market competition becomes more and more intense. If those companies want to survival and development better, then they must select the correct competition strategy. What ability does the producer have to control price in this industry? 1.
Producer can ask to raise the imposition prices of raw materials , to ensure sufficient supply of raw materials , make the raw materials sufficiently supply the market , prevent the shortage of raw materials when there is a lot of production produced. 2.
The local government...
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Brown, L. E. (May). www.nass.usda.gov. Retrieved from http://www.nass.usda.gov/Statistics_by_State/Kentucky/Publications/Pamphlets/tobacco06.pdf
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