Tobacco and Gray Market Activity

The price of smoking is going up. As the federal government increases taxes on tobacco products and tobacco companies raise prices to pay for state-initiated settlements, consumers will see the price of their favorite brands rise. In January 2000 federal taxes on tobacco were raised by 10 cents to 34 cents a pack, and various states have increased their taxes on tobacco as well.

A settlement in 1998 in which the tobacco companies agreed to pay over $200 billion to state governments was designed in theory to compensate state governments for increased health costs, reduce consumption of tobacco, and penalize the tobacco companies for their actions.

Because the foreign markets in which the American tobacco companies sell their products are competitive, domestic consumers will mainly pay the additional costs of higher taxes, litigation, and settlement expenses. Such consumers have seen prices rise by about 70 cents a pack, and higher prices are expected. The price charged for exported tobacco has remained basically unchanged because the American tobacco companies face stiff competition from foreign producers that were not affected by the court settlement or federal U.S. taxes.

When international companies sell in multiple markets and charge different prices, there is the potential that some of the cheaper products will find their way back into the exporting country. This market is referred to as the "gray market" and is more likely to develop when the price differentials are large and the product can be easily transported. Small price differences and products that are hard to ship do not lend themselves as well to gray market activity.

With the price differential increasing between American markets and foreign markets, more cigarettes exported from the United States are finding their way back into the United States. It is estimated that 5 percent of the U.S. tobacco market is now gray, and that proportion may rise even further as the effect of new taxes raises domestic prices even further, According to a spokesman for the Brown & Williamson Tobacco Company, "When you raise taxes, you don't change smoking patterns, just buying patterns." Increasing taxation has created a financial incentive for middlemen to redirect the channel of distribution and sell products intended for export back into the United States.

1. Find the English equivalents for the following words and expressions:

рынок конкурирующих продавцов, различия в ценах, “серый” рынок,

цены внутреннего рынка, материальный стимул, посредник, производитель, налогообложение, отечественные потребители, дополнительные расходы, канал распределения;

повысить налоги, сталкиваться с жесткой конкуренцией, сократить потребление, назначать цену, повышать цены, компенсировать что-либо.

2. Translate into Russian:

to increase taxes, to raise prices, to compensate for something, to reduce consumption, to charge a price, to face stiff competition;

competitive market, domestic consumers, price differentials, gray market,

domestic prices, taxation, financial incentive, middleman, distribution channel, additional costs, producer;

3. Match the following:

1. additional a. incentive

2. competitive b. taxes

3. domestic c. differentials

4. financial d. consumers

5. increased e. market

6. price f. costs

4. Say whether these statements are true or false:

1. The price of smoking is going up because of the need to increase health costs.

2. The gray market will exist as long as there are large price differentials in multiple markets.

3. Middlemen are the ones who benefit most from increasing taxation.

5. Discuss the following questions:

1. Which parties in this situation benefit and which parties are harmed by this gray market activity?

2. What can be done to reduce or eliminate this problem?