A REPORT ON ALCOHOL INDUSTRY

TABEL OF CONTENT
1. INTRODUCTION 2. COMPETITION 3. PRODUCT IN THIS INDUSTRY

4. ANALYSIS OF THIS INDUSTRY 5. HERFINDAHL INDEX 6. LAW OF SUPPLY AND DEMAND 7. EFFECT OF TAX 8. ELASTICITY OF ALCOHOL INDUSTRY 9. CONCLUSION

INTRODUCTION
The alcohol industry has traditionally been comprised of three sectors: beer, wine, and distilled spirits (whisky, gin, vodka). But in recent years, consolidation has resulted in more products being owned by fewer companies, some of which own brands in all three sectors. These multi-national corporations are powerful for their economic and global scope The alcohol industry is dominated by relatively few producers; and utilizes a powerful combination of advertising dollars, savvy marketing, political campaign contributions, and sophisticated lobbying

tactics to create and maintain an environment favourable to its economic and political interests. To describe this type of industry economists generally use the term OLIGOPOLY in which a few relatively large firm have moderate to substantial market power. This type of industry is characterized by differentiated product and entry is highly restricted. There are numerous local and regional competitors but there are only a few large firms that set the market patterns. Entry to this type of market is restricted due to economies of scale government intervention and high cost associated with this type of industry.

COMPETITION
In this industry 80% of the market is controlled by two major players United Breweries Limited and SABMiller India. The remaining 20 % market share is shared between some strong domestic players and some aspirational international Brands and they are Anheuser-Busch, Foster, and Carlsberg but they dont control the price in this market. This is mainly because of aggressive acquisitions of relatively successful brands by the big company in the recent times.

PRODUCTS IN THIS INDUSTRY

BEER
y y y y Kingfisher Royal Challenge Foster Carlsberg

WINE
y y y y Carlo Rossi Twin Valley Livingston Cellars Woodbridge

DISTILLED SPIRITS
y y y y Diageo PLC Bacardi USA Constellation Brands Smirnoff Vodka

ANALYSIS OF THIS MARKET

As an oligopoly is characterized by multiple firms, one or more of this will produce a significant portion of industry output. Oligopolies exist where a few large firms producing a homogeneous or differentiated product dominate a market. There must be few enough firms so that they are mutually interdependent, which means they must consider rival's reactions in response to decisions about prices, output, and advertising. The causes of the beer oligopoly are as followed: 1. Economies of scale exist, which indicate that a few large firms would be more efficient that many small one.

2. A high degree of capital investment required. 3. Other barriers to entry may exist like patents, control of raw materials, large advertising budgets, and traditional brand loyalty. As evident, all these criteria are satisfied by the Indian alcohol market

This market can be analysed using Cornout Model. As per it, each firm must decide how much to produce, and at the same time- taking its competitor in account. Also each player treats the output level of its competitor constant when deciding as to how much to produce. Based on this model we can draw the reaction curves of the 2 firms- UBL (49% market share) and SABMiller (38% market share).

As per the Duopoly Cournouts model the graph drawn below depicts the market conditions.

Q1 and Q2 represent production quantity of UB group and SABMiller R1R1 and R2R2 represent the UB groups and SABMillers reaction curve. With UB group as the market leader the quantity output is OR1. With this condition SABMiller selects various strategies to enter in to the market and capture the market share by acquisitions and international branding and it produces an output. Since SABMiller has entered the market the UB group will change its production by decreasing it along its reaction curve. Then both the player reach the equilibrium point (E) or try to attain the point such that the price is satisfactory, both of them are able to sell the quantity which is exhausted and are able to maximize their production. It is with this model the market leader UB group has moved to lower market share of 47% and SABMiller to37%. There will be further change in the market share to attain the equilibrium point (E). In the Cournot equilibrium model the two firms are making the profits that exceed those that earned under perfect competition but less than those that would be earned by monopoly. They earn less than a monopoly would earn because of their joint outputs exceeds the monopoly outputs. They earn more than perfectly competitive firms would make since each is aware that it drives the price down when it increases its own output. Thus the above analysis shows the duopoly market condition in Indian alcohol industry.

HERFINDAHL INDEX
Although there are more than 10 players in the market, two groups hold the maximum share of the market. On applying Herfindahl index to get a feel of the competition in the Market. The Four Major players and their share is provided are UB group 49.2% SABMiller share is 38.2% Millenium Alcohol 9.2% Mohan Making 4.2%

HHI = 492 + 382+ 92+42 = 3942 An HHI index of more than 1800 represents a highly concentrated market. With an HHI of 3942, we can deduce that this industry in India is highly concentrated and dominated by few players.

Laws of Supply and Demand:

It is argued that the 'supply side' is able to create and protect demand for alcohol through both taking advantage of and influencing government regulation of the market for alcohol. In relation to low alcohol beer the impact on public health and safety has been extremely positive. While it seems self-evident that alcohol obeys the laws of supply and demand like almost all other commodities, some witnesses came close to implying that it did not. Increases in the prices of alcoholic beverages lead to reductions in drinking. In each country the relationship between price and consumption is different. In some countries there are relatively high prices and high levels of consumption and vice versa. All these contrasts reveal is that there is a different relationship between price and consumption in each country. Each individual, each group and each country responds differently to a change in price, but all respond. The extent of this change is known by economists as the elasticity of demand. There can also be cross price effect in demand in this type of industry i.e. if the price of one alcoholic beverage increases relative to the others, some consumers may switch to a cheaper alternative.

EFFECT OF TAX
The price of alcohol can be manipulated through excise tax policies. The relationship between alcohol price and alcohol consumption

clearly are relevant for policy-makers interested in reducing alcohol consumption. An increase in the monetary price of alcohol can be achieved by raising taxes on alcoholic beverages. The main purpose of taxation is to generate general government revenue. The actual costs of excise taxes are generally passed along to consumers in the form of higher prices, putting downward pressure on consumer demand. But this tax effect lead to shift of consumer preference in other product of the same brand. Thus this tax effect does not stop consumer to drink but lead to shift of consumer choice in other brand.

Elasticity of alcohol industry

All these contrasts reveal that there is a different relationship between price and consumption. Each individual, each group and each country responds differently to a change in price, but all respond. The extent of this change is known by economists as the elasticity of demand. A price elasticity of -1.0 implies that for every percentage rise in price there will be the same percentage fall in consumption. If price elasticitys are larger than -1.0 then consumption is very responsive to price. More resent estimates by the UK Treasury suggest that, after a period when beer prices have been rising faster than general inflation, beer consumption has become more price elastic. The Treasury estimates price elasticitys for the Beer -1.0 Spirits -0.9 Wine -1.1

Effects of Prices on Heavy Drinkers.

Some heavy drinkers may be thought to be unresponsive to changes in the price of alcohol because of their dependence. On the other hand those who spend a large proportion of their income on alcohol may be more rather than less sensitive to such price changes. There is ample evidence

that at the population level, alcohol consumption is responsive to price. Many studies have concluded that heavier drinkers are more responsive to price than non-heavy drinkers. Other studies indicate that there is an interrelation between price and income, with young males on lower incomes being more susceptible to price elasticity than those on higher incomes.

CONCLUSION
Alcohol is not an ordinary commodity. While it carries connotations of pleasure and sociability in the minds of many, harmful consequences of its use are diverse and widespread. Price of the alcohol are increasing due to higher tax even then the alcohol products are becoming much more elastic because of the higher demand, but then also elasticity varies from country to country because of different culture and choice. In the last we can conclude by saying that alcohol industry is an oligopoly because there are few players in this type of market, there is barrier to entry so even the prices are higher their quantity demanded keeps on increasing.