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Managerial

Economics
E-501

APPLICATION OF MANAGERIAL
ECONOMICS THEORIES AND
PRACTICES IN THE TOBACCO
INDUSTRY OF BANGLADESH

Date of Submission: March 21,


2015

APPLICATION OF MANAGERIAL
ECONOMICS THEORIES AND PRACTICES
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IN THE

TOBACCO INDUSTRY
BANGLADESH

OF

Prepared for
Dr. A.K.M. Saiful Majid
Professor
Course Instructor: Managerial Economics
Institute of Business Administration (IBA)
University of Dhaka

Prepared by
Name
ID
Nahian-Al-Hossain Basunia
17
Laila Afreen
22
A.M.M. Habibul Mustafa
37
Md. Delwar Hossain Mazumder
38

Institute of Business Administration


University of Dhaka
March 21, 2015

Letter of Transmittal
15 March, 2015

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Batch
51st
51st
51st
51st

Dr. A.K.M. Saiful Majid


Professor
Institute of Business Administration
University of Dhaka
Dhaka
Subject: Submission of Project Proposal
Dear Sir
It is an immense pleasure for us to submit the proposal on Application of Economics Theory
and Practices in Tobacco Industry of Bangladesh with Reference to British American
Tobacco Bangladesh as a partial fulfillment of the requirement of course named Managerial
Economics of MBA program for our course prescribed group project.
We would like to thank you for giving us this unique opportunity to further enhance our
knowledge on the principles and applications of Economics. We are truly honored to have you
guiding us with your immense repository of knowledge and experience. We sincerely hope that
we will be able to fulfill your expectations and do justice in capturing the true essence of your
exceptional teachings in our project.
We would like to convey our special thanks and gratitude to you for patronizing our effort & for
giving us proper guidance and valuable advice. We have tried our best to cover all the relevant
fields. We will be honored to provide you any additional information, if necessary.
Thank you.
Sincerely yours,
A.M.M. Habibul Mustafa, ZR 37
Md. Delwar Hossain Mazumder, ZR 38
Laila Afreen, RQ 22
Nahian-Al-Hossain Basunia, ZR 17

A. Introduction
Tobacco-consumption is a widespread scenario in Bangladesh. More than half of all men and
nearly one in three women use tobacco in Bangladesh, according to a latest study on tobacco
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consumption. Conducted by Human Development Research Centre (HDRC) and Campaign for
Tobacco-Free Kids, the study looked at tobacco consumption trends among people aged 15 and
older, estimating that 46 million people out of 107 million consume tobacco.
About 58% of men and 29% of women smoke or chew tobacco in one of the cheapest tobacco
countries across the globe making up 43% of its total adult population. Bangladesh ranked
among top tobacco consuming countries where 57,000 people over the age of 30 die each year
from tobacco-related illness. Though Bangladesh signed WHO Framework Convention on
Tobacco Control (FCTC) in 2003 to control tobacco use by all means, it is yet to form a national
agency that experts think a key to fight tobacco. The survey revealed that tobacco consumption
in Bangladesh sharply rose in recent years, with cigarette sales going up by 40% and tobacco use
in the form of bidi increased by 80% between 1997 and 2013. Compared to 50.9 billion
cigarettes bought in 1997, the consumption was 76 billion pieces in 2013, while bidi sales
climbed from 43 billion in 1997 to over 82 billion in 2013. Excise taxes on cigarettes account for
half of the retail cigarette price in the country while total taxes are two-thirds of the retail price.
Anti-tobacco campaigners allege that the policy is at odds with countries having comprehensive
tobacco reduction approach where excise taxes typically account for 70% of retail price with
total taxes claim 75% of it. Different tax rates on different price slabs only benefit tobacco
manufacturers, they argued.
Amongst the tobacco manufacturers, British American Tobacco Bangladesh has emerged and
positioned itself as the premier multinational company in Bangladesh. It has experienced a
remarkable growth and development in the tobacco sector. It has a fame of being one of the
largest MNCs in Bangladesh having a glorious history of serving over 100 years. This paper is
going to observe the dynamics of Tobacco industry, from the perspective of Economics. During
this, British American Tobacco Bangladesh is taken as a reference.

A.1 Rationale of the Study

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The study will be conducted with a view to knowing whether tobacco industry is using and
complying with the different concepts and principles of Managerial Economics that we have read
throughout the semester. To do so, British American Tobacco Bangladesh will be taken as a
benchmark. During the study, we will analyze the demand and supply scenario of tobacco
products, find out the major players in the industry, the market structure, cost behavior and
government control in terms of price control and tax imposition and its effect on the consumers
economic behavior.

A.2 Objectives
A.2.1 Broad Objective
The broad objective of the study is to do a comprehensive scrutiny on British American Tobacco
Bangladesh (mostly concentrated in Dhaka), i.e. to collect and amalgamate all probable
important data regarding the tobacco industry in Dhaka and to give an overall insight of this
sector. The whole study will be done from the perspective of principles and concepts of
Economics that we have learned so far.
A.2.2 Specific Objectives
1. To understand the principles of economics and their application in British American
Tobacco Bangladesh and in that very industry.

2. Absolute and competitive advantage of British American Tobacco Bangladesh in this


sector.

3. To understand the demand and supply function, market equilibrium, income and
substitution effects on tobacco products of British American Tobacco Bangladesh.

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4. How price elasticity of demand and supply works in the tobacco industry, and computing
both for British American Tobacco Bangladesh also.

5. Price ceiling and price floor existing in the tobacco sector, consequence of this control in
the city.

6. Impacts of Govt. regulation and taxation in relation to British American Tobacco


Bangladesh.

7. Effects of Inflation on the tobacco sector.

8. Recommendations for enhancement and growth of the tobacco sector in Bangladesh.

A.3 Scope of the Study


The geographic scope of this study is confined within Dhaka city. For the demand side of the
study, information will be drawn from British American Tobacco Bangladesh, and existing and
potential buyers within Dhaka city. For the information on supply side, executives of British
American Tobacco Bangladesh and interview with employees of the organization will be
covered.

A.4 Methodology
The study is to be conducted on two sets of population, one representing the demand side and the
other the supply side of the tobacco sector. On the demand side, the population consists of
existing and potential consumers, and the supply side consists of interview with employees of the
organization. Interviews and questionnaires would consist much of the way through which
information would be gathered for this study.
A.4.1 Sources of Data
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This study will be conducted based on both primary and secondary data. The secondary study
will mainly require for the background study on this sector. For the supply side, interviews are
the primary sources of data.
For the demand side, primary sources will be from existing and potential clientele. Besides, some
secondary sources like small scale research reports conducted will also be used.
Primary source of information would also come from the interview and questionnaire that will be
conducted for the purpose of the study.

A.4.2 Research Design


This study is a combination of both Exploratory and Descriptive research methods.
A.4.3 Instruments of Data Collection
Various articles, websites and newspapers will be taken into account to get the necessary
secondary information. Questionnaires will enable to gather specific information relating to
supply and demand, price ceiling and price floor, govt. regulations and taxation, and inflationary
effects. The success of the questions could be measured by the quality and arrangement of the
questionnaire itself. This is because the information obtained would be fresh and unique.
A.4.4 Sample Design
As mentioned above, this study was conducted on two sets of population, one representing the
demand side and the other the supply side of the tobacco sector.
A.4.5 Sampling Technique
In this survey, non-probabilistic sampling methods will be selected because the complete
sampling frame for the target population was not available that is necessary to conduct the usual
probabilistic sampling techniques. Besides, limited time and budget would guide the researchers
to go for non-probabilistic methods.

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A.4.6 Sample Size


The sample size will be small. Thirty (30) potential and existing customers/employees will be
interviewed.

A.5 Timeline
The Conversion of Work Break down Structure into the Gantt chart is as follows:

Work Plan

Time in Weeks

Beginning of project:
Planning
Organizing of information
Developing, assessing and
relating principles
Findings and
Recommendations
Figure: Gantt chart (Source: Self- Made, 2015)
The above Gantt chart directly demonstrates the breakdown of the four phases of the project.
The four phases are planning, organizing, implementation and the controlling. The planning
phase includes concept development and feasibility studies, identifying the location, planning
research and formulating strategies. The planning phase takes up to 1 week. The planning phase
takes most of the time because without proper planning, it will be difficult to implement it. The
organizing phase includes conducting research in the selected location and evaluation. The
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organizing phase takes 2 weeks. The implementation phase include the developing, assessing and
relating theories to the information collected on tobacco industry of Bangladesh. To do this, it
will cost 1 week for us. Getting the overview of following of Man. Eco. Principles,finding out
the drawbacks and formulation of recommendations are the main concerns of the control stage.
This will take 1 week to complete. As a whole we will take 4 weeks to complete the project. In
the end, comes the closure of the project. The tentative submission date is 17th april, 2015.

A.6 Limitations
While conducting the study there maybe few obstacles that would constrain the effectiveness and
comprehensiveness of the study. Certain limitations might hamper the accuracy of this study.
First of all, employees may be reluctant to give out company information. The accuracy of
information provided by the company may not contribute to the overall quality or success of the
study. Bangladesh does not have organized secondary data of this sector unlike most developed
countries. Thus the information generated from primary research may not reflect the precise
scenario of current needs and our limited sample size may not be large enough to make accurate
generalizations about the entire population.

B. Literature Review

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According to Research Study on British American Tobacco Bangladesh, British American


Tobacco Bangladesh (BATB) is a subsidiary of British American Tobacco Group. It has been
incorporated in 1972 as Bangladesh Tobacco Company (BTC).Since 1972 BATB has been
operating in Bangladesh as one of the leading multinational organization. Since 1972 BATB
is operating as the market leader in the tobacco industry by providing some of the most
powerful

global

and local

brands.

At

present

BATB

is the

highest tax paying company, contributing around 7% of the total revenue of the Government
of Bangladesh. BATB is renowned as one of the most prominent socially responsible and
ethical company in the minds of the citizen.
The tobacco industry of Bangladesh is an age old industry. There a distinct monopoly in this
industry where British American Tobacco Bangladesh (BATB) leads the market with more
than 50% market share.
The main cigarette manufacturers today are:

British American Tobacco Bangladesh

Dhaka Tobacco Industries

AbulKhair Tobacco

Nasir Tobacco

Azizudin Industries and

New Age Tobacco.


The main biri manufacturers are:

AkijBiri

AbulBiri

NasirBiri

KarikarBiri

Aziz Biri and

Hundreds of local biri manufacturers.

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The industry is very price sensitive in nature. It is also a stick selling market, which means
that most of the tobacco consumers normally buy tobacco in sticks, not in packs. These two
features-price sensitive and stick selling-influences the business philosophies of the
companies.
At the moment, there are two main tobacco industry associations i.e. Bangladesh Cigarette
Manufacturers Association (BCMA) and Bangladesh Biri Manufacturers Association (BBMA)
representing the industry.
B.1 - Industry Segmentation:
The tobacco industry can be divided into two markets-Biri market and Cigarette market.
B.1.1 - Biri Market:
It is basically the non-filter cigarette market with a very low pricing. So biri is by far the
dominating segment in the tobacco industry. Recent trend has shown that biri market is
experiencing decline which is a favorable sign for the cigarette market. BATB does not operate
in this market. The major brand in this market is AkizBiri, product of Dhaka Tobacco
Industries. This is by far the most popular Biri in the country.
Cigarette Market:
Cigarette market is where BATB has all its focus. The market covers the rest 28% of the
industry. But the value of this market is lot higher than the biri market. The market can be
divided into four segments on the basis of price. They are:

Premium

Medium

Low

Very Low
BATB operates in the top three segments of the industry. It does not operate in the very low
segment. Along with BATB, DTI and Alpha Tobacco is also a major player in the low
segment.
Today, the market is estimated to be 64.2 billion sticks of biri and 51.8 billion sticks of
machine manufactured cigarettes. Biri overtook cigarettes as the more popular smoked
product in 1979. However, the market for biri has been on a declining volume trend since

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2003. This reflects the switch by consumers due to social pressure, urbanization, literacy rate,
economic growth and awareness by consumers. The market has a high International Brand
share (18.2%).

A.1.2 - Competitive Scenarios in the Cigarette Market:


In May 2008, Philip Morris International launched both full flavored and light variants of
Marlboro brand cigarettes in different markets of Dhaka. Dhaka Tobacco Industries is
manufacturing and distributing the brand.
BAT Bangladesh and Dhaka Tobacco Industries together hold more than 80% of the cigarette
market share.
Tobacco products are distributed either by manufacturers themselves, third party distributors
or wholesalers. The sales and distribution effort requires a large number of field employees
and agents because they have to serve about 880,000 individual retail outlets throughout
Bangladesh with a growth of 10% per annum.
The number of retail outlets is estimated to be growing by about 8% a year. The proliferation
of retail outlets is mainly due to the ease of entry and the low capital requirement. Many of
these outlets operate on limited capital and are unable to purchase quantities beyond their
immediate daily sales. The high number of retail outlets has created a stick market and
consequently imposed more frequent sales visits compared to other similar businesses.

The competition in the cigarette market is based on the price segment. There are individual
competitive brands in each price segment. There was no competition in the premium and
medium segment where the top International Brands of BATB dominate the market. But
when Dhaka Tobacco Industry (DTI) launched the brand Marlboro and Thames in the both
Premium and Middle segment the competition is raised. But still in the Segment of premium
and Medium BATB is the leader still. Only in the low segment there is a competition where
mainly three companies have their individual stakes and trying to take the segment leadership.
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In the very low segment, there is also competition among brands like Sun Moon, Five Star,
Wilson, Gold Hill etc (Anon., n.d.)
http://www.assignmentpoint.com/business/finance/research-study-british-american-tobaccobangladesh.html

B.2 - Segment wise Market Growth of Tobacco Industry

The tobacco industry in Bangladesh has an annual market size of about 135 billion. Market
penetration in Bangladesh is about 40% .Tobacco sales consists of 52% of filtered cigarettes
and 48% of unfiltered varieties, that is, bidi.

British American Tobacco (BATBC) is the only listed tobacco manufacturer with 99% market
share in the high end. BATBCs shareholding structure is as follows:
11% by Investment Corporation of Bangladesh (majority government - owned NBFI) and
16% free float. Other players in the tobacco industry are domestic conglomerates of
significant size: Dhaka Tobacco and AbulKhair Tobacco.

BATBCs low segment market share increased from 20% in 2006 to 60% in 2010. Net profits
grew at double digit rates in 2006 -2011. Excises are high and constitute 11% of the
Government Tax Revenue. Future profitability is expected to be driven by consumers
upgrading to higher segments.
http://www.slideshare.net/SajidHuq/bangladesh-growth-report-brac-epl-strat-sales-feb-27-2013
refer pg - 39

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B.3 -GDP Share of Tobacco Industry

On the global scale, Bangladesh ranks 21st in tobacco cultivation, with the largest being China,
followed by the US and India. With a total production of more than 38,000 metric ton of leaf,
Bangladesh accounts for about 0.4 % of the total volume of tobacco produced in the world.
Tobacco contributes less than 0.01% to the GDP of Bangladesh. (Placeholder1) (Fuad, 2012)
http://www.thefinancialexpress-bd.com/2014/09/18/56759/print

B.4- Government Tax and Other Regulations:

B.4.1 Tobacco Tax Structure in Bangladesh


Historically, price bands were created to recognize different quality and price bands of
cigarettes that range from low to high end. When VAT was first introduced on cigarettes in FY
1992- 93, there were four price bands. However, in FY 1994-1995 and FY 1995-96, this
number was increased to 5 under pressure of the cigarette industry. Increasing the number of
price bands led to massive switching to lower bands when tax rates were increased. To prevent
this, the number of bands was reduced to 4 in FY 1996-97. This continued up to the middle of
FY 1998- 99.
In January 1999, the number of price bands was increased to 6 as a result of collective
bargaining of the cigarette industry. This continued up to June 2000. Again the number of price
bands was reduced to 4 in FY 2000-01 through FY 2001-02. In FY 2002-02, the government
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took the initiative to reduce the number of price slabs to 3 to augment revenue. This continued
through FY 2003-04. Finally, the number of bands was raised to 4 in FY 2004-05 and since then
the number of price bands remained at 4.

B.4.2 Lopsided Tobacco Taxation Policy

Although cigarettes have been slapped with across-the-board tax hike, bidi, the indigenous
smoking stick, is left out of the new tax burden. Although price slabs increase substantially, SD
increased marginally during FY 2011-12 over FY 2010-11

FY 2010 - 2011
Category of Price per pack SD (%)

FY 2011 - 2012
Price per pack SD (%)

Change (%)
Changes in Changes in

Cigarettes

of 10 (In Taka)

of 10 (In Taka)

Price (%)

SD (%)

Low

8.40 - 9.15

33

11.00

36

30.95

9.09

55

22.28

3.77

58

18.52

3.57

and

60

15.38

3.45

11.50
Medium

18.40

53

19.00
High

27.00

23.00

56

32.00
Premiu

52

above

22.50

32.00
36.00

and

58

60
above

NB: In all cases, Value Added Tax (VAT) is imposed at the rate of 15%. The provision of
deferred payment (tax payment after 14 days) for cigarette manufacturers was repealed.

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B.4.3 - Administrative Issues in Tobacco Taxation

Tobacco taxation in Bangladesh is governed by Value Added Tax Act, 1991. Out of the three
wings of the NBR namely, income tax, VAT and customs wings, VAT Wing is responsible for
enforcing the law. The organizational structure of the NBR is shown in Figure 1
Figure 1: Organizational Dimensions of NBR

VINC
Aniu
Tcas
oBCt

a
o

n
l
o

DCWmro
ieom
vrnTRis
cigaes

d
f
s

e
i n

slxeoW
eiwn
soien

nag
sge

t
s

v
u

The enforcement of tobacco tax is done by a VAT Commissionerate (headed by a


Commissioner) and its field offices namely, Divisions and Circles. Several problems persist in
the NBRs tax administration. These are:

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Most of the NBRs tax processes are manual and there is little in the nature of taxpayer
education and taxpayer services.
The NBR faces the acute shortage of trained tax officials as well as physical infrastructure. It
also faces problems in its functioning due to lack of distribution of tax work by function and
size.
There is little research-policy linkage.

B.4.4 - Political Dimensions of Tobacco Taxation

According to the Constitution of Bangladesh, levy or collection of any tax requires the approval
of the Parliament. Stakeholder consultation for new tax proposals commences from March
every year. During the pre-budget period, the NBR holds consultation with the members of
business associations, different levels of government, Members of Parliament (MPs), media and
NGOs and proposes tax measures. A tax proposal is placed before the Council of Ministers for
its concurrence and then it is introduced in the form of Finance Bill as budget document to the
Parliament in the second week of June every year.
Enhancing consumer price of bidi through tax measures appears more challenging for the NBR
for political reasons.
Firstly, several MPs are involved in tobacco business.
Secondly, it is claimed that about 2.5 million workers are engaged in bidi industry, many of
whom are poor women and children. Controlling bidi consumption will force bidi
manufacturers to downsize their production, which will in cause unemployment of bidi
workers.

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Thirdly, bidi consumers belong to the poorest segment of the society. Raising tax and price of
bidi will, therefore, result in loss of popularity of the government among this population.

The pressure of bidi manufacturers is evident from the fact that since FY 2005-06 there is no
change in SD rate in bidi. Moreover, the tariff value for a pack of 25 sticks non-filtered bidi
remained at Tk 3.1579 since FY 2008-09.
During FY 2011-12 budget cycle, more than 120 MPs made written representation to the NBR
not to increase bidi price. Rather they demanded complete withdrawal of tax from bidi. Bidi
manufacturers association created substantial pressure to split the tariff value (bidi tax base)
into three price bands namely, 12 sticks per pack, 10 sticks per pack and 8 sticks per pack and
they succeeded. Splitting of tariff value in FY 2011-12 may have three effects on revenue and
health.
Firstly, there may be huge substitution effect from medium and low bands of cigarettes to
bidi.
Secondly, the scope of revenue evasion may increase because of opportunity for swapping
banderols between different price slabs. Thirdly, this may also have negative impact on health
because of likely increased consumption of bidi.

B.4.5 - NBR-WHO Collaboration on Tobacco Taxation

The main objective of the NBR-WHO collaboration is to strengthen the policy development
process and tobacco tax administration at the NBR. In May 2010, WHO provided technical
assistance for developing Tax Simulation Model to be used by the NBR.WHO helped to
establish a Tobacco Tax Cell at the NBR:

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to develop tobacco database


to conduct research on tobacco market trends;
to analyze the impact of tobacco tax on health and revenue
to formulate evidence based policy on tobacco taxation.
WHO supported several training programs for NBR officials to strengthen their capacity.

http://www.who.int/tobacco/economics/meetings/wctoh_2012_tob_tax_bangladesh.pdf

B.5 - Demand for Tobacco in Bangladesh

Over the past decade, a growing number of studies have examined the impact of taxes and
prices on tobacco use in low and middle-income countries. These studies have estimated a wide
range of price elasticities, with some, but not all, indicating that demand for tobacco products is
more responsive to price in low and middle-income countries than it is in high income
countries. For example, Hu and Mao (2002) estimate that the price elasticity of cigarette
demand in China ranges from 0.50 to 0.64, while Karki and colleagues (2003) estimate an
overall price elasticity of cigarette demand of 0.88 in Nepal. 27,28 John (2008) examined
demand for multiple tobacco products in India, estimating price elasticities of 0.35, 0.91, and
0.88 for cigarettes, bidis, and leaf tobacco, respectively. 29 More recently, Guindon and
colleagues (2011) updated and extended Johns analysis, estimating cigarette and bidi price
elasticites of 1.03 and 0.94, respectively. 30 As in studies for high-income countries, studies
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from low and middleincome countries that account for the addictive nature of tobacco use find
that demand responds more to price in the long run. For example, Aloui (2003) estimates short
run price elasticities for tobacco use in Morocco in the range from 0.51 to 0.73, and estimates
long run elasticities that range from 1.36 to 1.54. 31 Findings from studies bas ed on
individual-level survey data on adult tobacco use indicate that taxes and prices influence both
tobacco use decisions (prevalence) and the frequency and amount of tobacco consumption. In
general, the estimates from highincome countries suggest that about half of the impact of price
on tobacco use results from its effect on prevalence. Given that relatively little initiation occurs
during adulthood, these changes largely result from cessation among adult users. This is
confirmed by a small number of studies which find that increases in price lead a number of
current users to try to quit, with many users successful in doing so in the long run.

B.5.1 Existing Evidences of Demand for Tobacco in Bangladesh

To date, a few studies have estimated the price elasticity of demand for tobacco products in
Bangladesh. Ali and colleagues (2003) estimated tobacco demand for Bangladesh using annual
time series data from 1983 through 1999 to estimate a relatively parsimonious model that
included prices and per capita GDP as the only explanatory variables. They obtained a negative
but statistically insignificant price elasticity of 0.27, and a positive and significant income
elasticity of 0.62. They did not estimate bidi demand given the lack of data on bidi prices and
consumption over time. Guindon and colleagues (2003) estimated cigarette demand for
Bangladesh as part of a larger study that also estimated demand in Indonesia, Nepal, Sri Lanka,
Thailand, Maldives, and Myanmar. 36 Using annual time series data from 1970 through 2000,
they too estimated a relatively parsimonious model that included only price and income as
determinants of demand. In addition to estimating a conventional demand model, they also
estimated a myopic addiction model. Like Ali and colleagues, they found no significant effect
of prices on cigarette demand in either model. In their country-specific models for the other
countries they examined, they generally found negative and often significant price effects, with
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shortrun price elasticity estimates for cigarette demand clustered around 0.5 and long-run
elasticity estimates clustered around 0.7. More recently, Nargis and colleagues (2010, 2011)
have used the individual level data from the ITCBangladesh survey to estimate the price
elasticity of cigarette and bidi demand in Bangladesh. 37,24 Given the low prevalence rates of
cigarette smoking among women, cigarette demand models were estimated for adult males
only; bidi demand models were estimated for both men and women. In addition to price and
income, Nargis and colleagues controlled for a variety of other factors in their demand models,
including age, marital status, educational attainment, employment status, household size,
urban/rural location, the number of years since initiation, and survey year (in the 2011 analysis
that used both the 2009 and 2010 survey data)

Table : Estimated Price Elasticities of Cigarette and Bidi Demand from International Tobacco
Control Policy Evaluation Project (ITC) Bangladesh Surveys, 2009 & 2010

2009

Pooled 2009 & 2010

Cigarettes

Bidi

Cigarettes

Bidi

Prevalence

-0.29***

-0.46*

-0.44***

0.03

Conditional

-0.14***

-0.18

-0.22***

-0.22**

-0.43

-0.64

-0.66

-0.22

Demand
Total

Source: Nargis et al.(2010, 2011)


Note:***,** and * represents estimates statistically significant at 1%, 5% and 10%
significance levels respectively.

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B.5.2 New Estimates for Tobacco Demand in Bangladesh

Annual time series data on aggregate cigarette consumption from 1981 through 2004 to
generate new estimates of price elasticity was used. In contrast to the earlier time-series
analyses by Ali and colleagues (2003) and Guindon and colleagues (2003), we apply an
econometric methodology that accounts for the time series properties of the data. 34,35, *
Given available data, our model is similarly parsimonious and includes only price and income
as determinants of cigarette demand. Aggregate cigarette consumption data were obtained from
the Bangladesh Bureau of Statistics and were divided by population to obtain a measure of per
capita consumption. Cigarette price data reflect the inflation adjusted price of Star brand
cigarettes, the most popular brand of cigarettes consumed in Bangladesh over this time period.

Cigarette price is found to have a negative and statistically significant impact on cigarette
demand in Bangladesh, while income is found to have a positive and statistically significant
impact. Estimated short run price and income elasticities are 0.41 and 1.14 respectively, with
long run estimates of 0.57 and 1.46. Together, the estimates imply that the past decades
general trend towards increasingly affordable cigarettes, plus the combined effect of reductions
in cigarette prices and increases in household income, have led to significantly higher cigarette
smoking in Bangladesh than would have been the case had cigarettes remained less affordable.

http://global.tobaccofreekids.org/files/pdfs/en/Bangladesh_tobacco_taxes_report.pdf

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C. Theories to be covered
C.1 Circular Flow Diagram
The circular flow of income or circular flow is a model of the economy in which the major
exchanges are represented as flows of money, goods and services, etc. between economic agents.
The flows of money and goods exchanges in a closed circuit and correspond in value, but run in
the opposite direction.

C.2 Porters Five Forces


Porter five forces analysis is a framework to analyze level of competition within an industry and
business strategy development. It draws upon industrial organization (IO) economics to derive
five forces that determine the competitive intensity and therefore attractiveness of an Industry.
Attractiveness in this context refers to the overall industry profitability. An "unattractive"
industry is one in which the combination of these five forces acts to drive down overall
profitability. A very unattractive industry would be one approaching "pure competition", in
which available profits for all firms are driven to normal profit.

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C.3 Principles of Economics (Relating to the Ten Principles of Economics)


How people make decisions:
1. People Face Tradeoffs. To get one thing, you have to give up something else. Making
decisions requires trading off one goal against another.
2. The Cost of Something is What You Give Up to Get It. Decision-makers have to consider
both the obvious and implicit costs of their actions.
3. Rational People Think at the Margin. A rational decision-maker takes action if and only if
the marginal benefit of the action exceeds the marginal cost.
4. People Respond to Incentives. Behavior changes when costs or benefits change.
How the economy works as a whole:
5. Trade Can Make Everyone Better Off. Trade allows each person to specialize in the
activities he or she does best. By trading with others, people can buy a greater variety of
goods or services.
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6. Markets Are Usually a Good Way to Organize Economic Activity. Households and firms
that interact in market economies act as if they are guided by an "invisible hand" that
leads the market to allocate resources efficiently. The opposite of this is economic activity
that is organized by a central planner within the government.
7. Governments Can Sometimes Improve Market Outcomes. When a market fails to allocate
resources efficiently, the government can change the outcome through public policy.
Examples are regulations against monopolies and pollution.
How people interact:
8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
Countries whose workers produce a large quantity of goods and services per unit of time
enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its
average income.
9. Prices Rise When the Government Prints Too Much Money. When a government creates
large quantities of the nation's money, the value of the money falls. As a result, prices
increase, requiring more of the same money to buy goods and services.
10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. Reducing
inflation often causes a temporary rise in unemployment. This tradeoff is crucial for
understanding the short-run effects of changes in taxes, government spending and
monetary policy.

C.4 Invisible Hand


A term coined by economist Adam Smith in his 1776 book "An Inquiry into the Nature and
Causes of the Wealth of Nations". In his book he states:
"Every individual necessarily labors to render the annual revenue of the society as great as he
can. He generally neither intends to promote the public interest, nor knows how much he is
promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an
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invisible hand to promote an end which was no part of his intention. Nor is it always the worse
for society that it was no part of his intention. By pursuing his own interest he frequently
promotes that of the society more effectually than when he really intends to promote it. I have
never known much good done by those who affected to trade for the public good."
Thus, the invisible hand is essentially a natural phenomenon that guides free markets and
capitalism through competition for scarce resources.

C.5 Demand and Supply Function


Supply and demand is perhaps one of the most fundamental concepts of economics and it is the
backbone of a market economy. Demand refers to how much (quantity) of a product or service is
desired by buyers. The quantity demanded is the amount of a product people are willing to buy at
a certain price; the relationship between price and quantity demanded is known as the demand
relationship. Supply represents how much the market can offer. The quantity supplied refers to
the amount of a certain good producers are willing to supply when receiving a certain price. The
correlation between price and how much of a good or service is supplied to the market is known
as the supply relationship. Price, therefore, is a reflection of supply and demand. The relationship
between demand and supply underlie the forces behind the allocation of resources. In market
economy theories, demand and supply theory will allocate resources in the most efficient way
possible.

C.6 Game theory


A model of optimality taking into consideration not only benefits less costs, but also the
interaction between participants. Game theory attempts to look at the relationships between
participants in a particular model and predict their optimal decisions.
C.7 Price War

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When a company wants to increase market share, usually the easiest way is to reduce prices,
which increases product sales. The competition may be forced to follow suit if its products are
similar. As prices get lower the quantity of sales increases and customers receive the benefits.
Eventually, a price point is reached that only one company can afford. Some companies will even
sell at a loss in an attempt to eliminate the competition completely.
C.8 Production Function
A production function specifies the maximum output that can be produced for a given amount of
input. Alternatively, a production function shows the minimum quantity of input necessary to
produce a given level of output.

C.9 Inflation
In economics, inflation is a sustained increase in the general price level of goods and services in
an economy over a period of time. When the price level rises, each unit of currency buys fewer
goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit
of money.
C.10 Fiscal Policy
In economics and political science, fiscal policy is the use of government revenue collection
(mainly taxes) and expenditure (spending) to influence the economy. According to Keynesian
economics, when the government changes the levels of taxation and government spending, it
influences aggregate demand and the level of economic activity.

C.11 Monetary policy


Monetary policy is the process by which the monetary authority of a country controls the supply
of money, often targeting an inflation rate or interest rate to ensure price stability and general
trust in the currency.
C.12 Exploratory research
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Exploratory research is research conducted for a problem that has not been clearly defined. It
often occurs before we know enough to make conceptual distinctions or posit an explanatory
relationship. Exploratory research helps determine the best research design, data collection
method and selection of subjects. The objective of exploratory research is to gather preliminary
information that will help define problems and suggest hypotheses.
C.13 Descriptive research
Descriptive research is used to describe characteristics of a population or phenomenon being
studied. It does not answer questions about how/when/why the characteristics occurred. Rather it
addresses the "what" question (what are the characteristics of the population or situation being
studied?). The objective of descriptive research is to describe things, such as the market potential
for a product or the demographics and attitudes of consumers who buy the product.
C.13 Causal research
Causal research (also referred to as explanatory research) is the investigation of (research into)
cause-and-effect relationships. In order to determine causality, it is important to observe variation
in the variable that is assumed to cause the change in the other variable(s), and then measure the
changes in the other variable(s). The objective of causal research is to test hypotheses about
cause-and-effect relationships. If the objective is to determine which variable might be causing a
certain behavior, i.e. whether there is a cause and effect relationship between variables, causal
research must be undertaken. In order to determine causality, it is important to hold the variable
that is assumed to cause the change in the other variable(s) constant and then measure the
changes in the other variable(s).

D. Industry Overview
Cigarette manufacturing is highly concentrated in Bangladesh, while bidi manufacturing is much
more fragmented. Cigarette markets are dominated by two firmsBritish American Tobacco
Bangladesh (BATB) and the domestic Dhaka Tobacco Industries (DTI), a part of the Akij Group.
BATB is one of the oldest tobacco product manufacturers in Bangladesh, in operation for over
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100 years. BATB brands account for almost 46.8% of cigarette consumption in 2014, down
somewhat from the 54% half of the market the company had controlled as recently as 2006.
DTI is part of the Akij Group, a large domestic conglomerate that includes a variety of
subsidiaries involved in cement, computers, foods & beverages, jute, textiles, pharmaceuticals,
and much more. DTI has historically focused on the lower priced segment of the market. DTIs
key brands include lower priced brands Sheikh, K-2, Five Star, Red & White, Real, and Surma;
other major brands are Navy (mid-priced) and Caste (premium). In addition, in 2007 DTI entered
into an agreement with Philip Morris International (PMI) to market PMIs brands, most notably
Marlboro, in the Bangladeshi cigarette market. DTIs share of the cigarette market is around
35.9% in 2014.
There are a number of other smaller domestic cigarette companies operating in Bangladesh,
including Abul Khair Tobacco Company (AKTC), Jamil Tobacco Company Ltd., Alpha Tobacco
Manufacturing Company, Azizuddin Industries Ltd., Sonali Tobacco Company Ltd., National
Tobacco, and Nasir Tobacco. Together, they account for 15-20% of the Bangladeshi cigarette
market. To date, Japan Tobacco International and Imperial Tobacco/Altadis, the worlds other
leading multinational tobacco companies, have not established a significant presence in
Bangladesh, with imports of their brands and other multinational brands accounting for a very
small share of the Bangladeshi market.
B&H, switch, State Express 555, Gold Leaf, Pall-mall, Capstan, Star, Pilot, Bristol and
Hollywood are the brands that are marketed by BATB. Dhaka Tobacco Industries Ltd. produces
eight brands of cigarettes. These are Navy, Legend White, Five Star, Red & White, K2, Surma
and Diamond. One hundred million of the Navy brand are exported quality and are sold in
Dubai. Rally, Marise, Sunmoon, Super King, Abul Biri are the main products of Abul Khair
Tobacco Company. Java Black and Golden Hill are brands of Jamil Tobacco.
Most cigarettes produced and sold in Bangladesh are filter-tipped, with market share stable at
around 86% for the past decade, after rising sharply in the 1997. Nearly all cigarettes consumed
in Bangladesh are high-tar cigarettes, although lower tar brands are starting to emerge. Most
premium brand cigarettes are sold in packs of 20, while less expensive cigarette brands are more
often sold in packs of 10. The smaller packs appear to be targeted at keeping pack prices
affordable for lower income smokers. Over half of cigarette consumption is of inexpensive
brands and about 30% is of mid-priced brands.
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In contrast, bidi production is much more fragmented than cigarette manufacturing. The top 4
firms account for a little less than 50% of the market, and, according to the 2001/03 Economic
Census, there were a total of 9,624 bidi manufacturers, with over 96% of these household based.
Among bidi manufacturing companies, Akij Bidi Factory, Ltd, another subsidiary of the Akij
Group, is the largest, with an estimated market share of 29.1% in 2009 (GTSS, 2009). Akij
Groups ownership of both Dhaka Tobacco Industries and Akij Bidi Factory could result inshared
distribution channels and marketing practices. Aziz Bidi Factory is the only other company with
more than 10% of the market, while the remainder account for shares of around 5% or less. Most
bidis are sold in packs of 25.

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