An electronic cigarette is a smoking apparatus made up of small container with a liquid nicotine solution, which is turned into a mist of tiny droplets in the air when heated and later inhaled. The act of inhaling this mist is colloquially known as “vaping,” to subside and satisfy the consumers nicotine addiction. Vaping products are available in a variety of flavors and nicotine strengths, and some devices can also be used with THC or CBD oils.
The electronic cigarette market is a global market, with production and sales taking place in countries around the world. The agents in the electronic cigarette market are manufacturers, distributors, retailers, and consumers. Manufacturers produce e-cigarettes, e-liquids, and accessories. Distributors sell these products to retailers. Retailers sell these products to consumers. Consumers are the people who use e-cigarettes. Consumers of vaping products are typically adults, although there have been concerns about the increasing popularity of these products among teenagers and young adults.
The production and distribution of vaping products is typically regulated by government agencies, and there are often restrictions on the sale and marketing of these products to minors, who fail to understand the implications of e-cigarettes on their health due to risks and long term effects not being advertised by producers clearly.
The buying and selling of vaping products can take place through both online and retail stores.
When it comes to finalizing the type of market which the e-cigarette market is closest to, it draws the most similarities with an oligopoly. The market for is an oligopoly, with a few firms controlling a large share of the market. This can lead to a number of problems, including high prices, less innovation, and less consumer choice. Prices for electronic cigarettes are often higher than they would be in a more competitive market. Moreover, there is less innovation in the market, as the oligopolists do not need to compete as fiercely to attract customers. Finally, consumers have less choice in the market, as there are a limited number of companies to choose from. Contrary to popular belief, the market is not perfectly competitive because of barriers to entry, product differentiation, and non-price competition. Barriers to entry make it difficult for new businesses to enter the market, product differentiation makes it difficult for buyers to compare prices, and non-price competition makes it difficult for sellers to compete on price alone.
The foremost externality of the e-cigarette market is the potential health effects of directly consuming e-cigarettes on both smokers and second-hand smokers. These health effects include but are not limited to: lung disease, heart disease and cancer. While some studies suggest that vaping may be a less harmful alternative to smoking traditional cigarettes, there is still much debate and uncertainty surrounding the long-term health effects of vaping.
The agents involved in the e-cigarette market may also have imperfect information, particularly in regards to the health effects of vaping. Consumers usually do not completely understand the risks of using electronic cigarettes, and may be influenced by marketing and advertising efforts promoting these products as a safe alternative to smoking.
The manufacturing process of e-cigarettes involves the extraction of raw materials such as metals, plastics, and chemicals, which can have negative environmental impacts. For example, the extraction of metals, such as lithium and cobalt. Moreover, disposal e-cigarette devices and their components, contribute to electronic waste. These items can contain harmful chemicals and heavy metals that can contaminate land and natural resources if disposed of improperly.
It is important to consider these impacts when evaluating the costs and benefits of the use of these devices.
When it comes to regulations that have an affect on the market, different countries have varying regulations that apply to the electronic cigarette market. These regulations can have an effect that could potentially limit the sales of the product, and even place certain restrictions on the advertising of the products. In some countries, such as The United States of America, New Zealand etc. have set minimum age limits for purchasing and consuming e-cigarettes, while also mandating the research and design and labeling of the products.
There remains an ongoing discussion about how to balance the need for protecting public health with promoting innovation and competition in the industry.
The electronic cigarette market is a global market that is rapidly growing. In 2022, the global market was valued at $19.79 billion and is projected to reach $66.72 billion by 2030. The electronic cigarette market is made up of two main types of products: disposable e-cigarettes and rechargeable e-cigarettes. Disposable e-cigarettes are pre-filled with e-liquid and do not require any maintenance. Rechargeable e-cigarettes, on the other hand, come with a tank that can be filled with e-liquid.
“We calculate an e-cigarette own-price elasticity of -2.2 and particularly large elasticity of demand for flavored e-cigarettes. Further, we document a cigarette own-price elasticity of -0.4 and positive cross-price elasticities of demand between e-cigarettes and cigarettes, suggesting economic substitution.” (Cotti, C. 2022).
Demand for e-cigarette products is generally considered to be Inelastic, implying that changes in quantity demanded are less significant than the changes in price. Consumers comprise of those who search for a healthier alternative to cigarettes, as well as individuals who have never smoked cigarettes. Individuals can actually increase their purchasing parity within the same budget, as substituting cigarettes for electronic cigarettes is cheaper and would shift out their budget line in an outwards pivot. However, there remain a wide variety of substitute goods available, such as traditional cigarettes, cigars, nicotine gums, nicotine patches etc. which can be more or less appealing depending on price and other factors. Consumers in the e-cigarette market may experience decreasing marginal utility of consumption, which means that the additional satisfaction or pleasure they receive from using electronic cigarettes may decrease with added consumption. This can be due to factors such as habituation or tolerance, where the user becomes accustomed to the effects of nicotine.
There are also important complements in the e-cigarette market, such as e-liquid, coils, wicks and other accessories that are needed to operate and maintain vaping devices. These complementary goods can be a significant source of revenue for manufacturers, distributors, and retailers in the industry. The revenue raised from the commentary goods associated with electronic cigarettes is significant. This revenue is generated by firms selling e-liquid, e-cigarette coils etc. For evidence, a study by the NPD Group found that the market for e-liquids, e-cigarette coils, etc. grew by up to thirty percent as early as in 2018. Additionally, a report by the GlobalData market research firm discovered that the market for e-liquids, e- cigarette coils, etc. is expected to reach $42.2 billion by 2025.
The first step in production is the design phase, where a blueprint is drafted. The materials to be used, its design including size and shape are finalized. Once the design is finalized, the manufacturing process begins. This typically involves “creating molds or other tools for shaping and forming the components of the device.” Once the individual components have been manufactured, they are assembled into a completed version of the device.
There are both high fixed costs and high variable costs associated with production. Fixed costs primarily include the costs of designing and developing the device. Fixed costs must also take into account the costs of purchasing or leasing capital and the land on which the factory is constructed. It also must include raw materials purchased whether they are materials or nicotine and flavoring solvents, and wages of hired labour.
Variable costs mainly amount to the cost of raw materials necessary for the amount produced, distribution of the product to consumers both domestically and internationally. Lastly, variable costs for firms are highly dependent on advertising, and need to promote it adhering to regulations.
The production function can be expressed as:
Q = f(K, L)
Where:
Q = quantity of electronic cigarettes produced
K = capital
L = labor
The production function assumes that inputs are used in a specific combination to produce a given output. The production function also assumes that there are diminishing marginal returns to each input, meaning that as more of a given input is used, the additional output produced from each unit of input decreases. For example, as more labor is used in production, the additional output produced from each additional worker may decrease.
The production function can be used by firms in the market to optimize their production processes and maximize profits. By adjusting the inputs used in production, firms can increase the quantity produced while minimizing costs. However, it is important to note that the production function is subject to external factors, such as changes in market demand, input prices, and technological advances, which can impact the overall profitability of firms in the market.
The cost function can be expressed as:
C = wL + rK
Where:
C = total cost of production
w = wage rate for labor
L = amountof labor used in production
r = rental rate for capital
K = amount of capital used in production
The cost function assumes that the inputs are used in a specific combination to produce a given quantity, and that the prices of the inputs are fixed. The cost function can be used by firms in the market to determine the total cost of production for a given quantity of e-cigarettes, and to determine the optimal combination of inputs to minimize costs.
The cost function can also be used to determine the marginal cost of producing additional e-cigarettes. The marginal cost is the additional cost of producing one more unit of output. In the market, the marginal cost can be calculated by taking the derivative of the cost function with respect to the quantity being produced:
MC = ∂C/∂Q = w(∂L/∂Q) + r(∂K/∂Q)
Where:
MC = marginal cost
Q = total quantity produced
The marginal cost is important for firms in the market to determine the optimal level of production and pricing for their products. If the marginal cost is greater than the market price, the firm may need to decrease production or increase prices to maintain profitability. Conversely, if the marginal cost is less than the market price, the firm may be able to increase production or decrease prices to increase profits.
The rules of the e-cigarette market are generally determined by market forces, such as supply and demand, and by government regulations. Some key rules of the market include:
1. Property rights: Buyers and sellers in the e-cigarette market have clear property rights over the e-cigarettes being traded. This means that sellers have the right to sell their products at a mutually agreed-upon price, while buyers have the right to purchase the e-cigarettes at that price.
2. Quality standards: The e-cigarette market may be subject to quality standards that ensure that the products being traded meet certain safety and quality requirements. This may include testing for harmful chemicals and ensuring that products meet certain design and manufacturing standards.
3. Advertising and marketing regulations: The e-cigarette market may be subject to regulations on advertising and marketing practices to prevent deceptive or misleading practices that may harm consumers or misrepresent the quality or safety of the products being sold.
