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Unit 1 Micro: The Market for E-Cigarettes

Friday, June 07, 2013
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The emergence of a competitor product can often send shock-waves through markets of established products where profits have been more or less guaranteed for decades. Will e-cigarettes have a similar effect on the tobacco industry?  And is this an emerging industry in need of greater government regulation and taxation?

E-cigarette users inhale a nicotine-laced vapour, replicating the experience of smoking without the smoke and carcinogens that are released through combustion. The device was first invented in China back in 2003 and the vast majority of e-cigarettes are now manufactured in China and then exported to other countries. The battery powered, pen-sized products contain liquid nicotine that is turned into a vapor which is then inhaled.

Sales of traditional cigarettes in most developed countries have been declining steadily in the past decade. According to the USA Centers for Disease Control and Prevention, consumption of smoked tobacco products in the USA fell 27 per cent from 2000 to 2011, as taxes increased and smoking bans at in public places took hold. 

Even so, the US cigarette market is still worth $90bn a year and brings in billions of dollars of tax revenue for the US government.

Many e-cigarettes are sold in a similar way to razors and blades, with disposable cartridges that click on to a long, silver battery-powered unit. Typically, e-cigarettes are around 20% cheaper than standard cigarettes. 

If manufacturers benefit from economies of scale as sales increase, they could end up being half the price, especially if they end up being regulated as a medicine and are exempted from VAT which is currently 20%.

Although smokers have turned to electronic cigarettes for health reasons there are some concerns over their safety and regulation. Unlike patches and gum, e-cigarettes are not regulated like medicines. It means there are no rules for example about the purity of the nicotine in them.

The World Health Organisation has raised concerns about the use of e-cigarettes claiming that manufacturers have not fully disclosed the chemicals used in them, that there is little data on emissions or actual human exposure. And that marketing and use could undermine public smoking bans, which are important tobacco control interventions. 

The French government is planning to treat e-cigarettes in the same way as tobacco, and outlaw their use in public places.

Smoking-related illnesses kill around 114,000 people a year in the UK and cost the NHS an estimated £2.7bn. Since 1965, cigarette advertising has been banned on British TV, and slots promoting smoking or tobacco are still outlawed.

E-cigarettes in the USA

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