Concentration Ratio, Advertising Intensity, Sales Growth, The
Government’s Regulation and Profitability in Indonesian Cigarette
Industry
Yulia Saftiana, Bernadette Robiani, Syamsurijal, and Suhel
Faculty of Economic, Universitas Sriwijaya, Palembang, Indonesia
Keywords: concentration industry, advertising intensity, price cost margin, regulation, sales growth
Abstract: This study examined the effect of concentration ratio, advertising intensity, and the government’s regulation
on profitability in Indonesian cigarette industry. This study used secondary data of the cigarette industry in
Indonesia. It was from the Central Bureau of Statistics (BPS) and the Indonesia Stock Exchange (BEI). In this
study, the population is the manufacturing industry sector in Indonseia during the period 1993 to 2013.
Selection of this sample is based on the completeness of the data held. The results show Concentration,
advertising intensity, regulation, and sales growth have an effect on long-term earnings stronger than short-
term. The test results also show that Government Regulation No. 81 of 1999 has not significantly affected the
structure, conduct and performance of the cigarette industry. Despite the descriptive earnings of cigarette
companies listed on the Indonesia Stock Exchange tend to be smaller, but total sales are increasing. This
means that government policy has not been effective in reducing cigarette consumption. Law No. 32 of 2002
on broadcasting is statistically significant affecting price cost margin in a positive direction. However, the
descriptive ratio of earnings in cigarette companies listed on the Indonesia Stock Exchange tend to decline.
1 INTRODUCTION
The Indonesian cigarette industry contributes
significantly to the state income, in the form of
cigarette Excise. The following table shows the
contribution of excise to total domestic income of
cigarette is greater than the contribution of state
income from the share of SOE profits during the
period of 2007 to 2014. The contribution of the
cigarette industry during that period averaged 3 times
the contribution of income from the share of profit of
SOEs.
When compared with contributions from natural
resource income, from 2007 to 2015, contributions
derived from natural resource income were seen to
decline, initially 18.22% in 2007 and 22% in 2008,
down in 2014 to 15.58%. The contribution of the
cigarette industry to total domestic income was seen
to increase, by 6.33% in 2007 and down 5.23 in 2008
and then gradually increasing to 7.64% by 2014. This
shows that the state income from excise significant
enough to total state income. 2.61
Saftiana, Y., Robiani, B., Kadir, S. and Suhel, .
Concentration Ratio, Advertising Intensity, Sales Growth, The Government’s Regulation And Profitability In Indonesian Cigarette Industry.
DOI: 10.5220/0008444106930698
In Proceedings of the 4th Sriwijaya Economics, Accounting, and Business Conference (SEABC 2018), pages 693-698
ISBN: 978-989-758-387-2
Copyright
c
2019 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
693
Table 1: The Contribution of Excise of Tax Income, Domestic Tax Income, Total Domestic Income in The Country
compared to The Contribution of Natural Resource Income and The Share of SOEs' Profits (in percentage)
Year
Contribution of
Excise on Total
Tax Income
Contribution
of Excise on
Total
Domestic Tax
Income
Contribution of
Excise on Total
Domestics
Income
Contribution
Natural
Resources
Income on
Total
Domestics
Income
Contribution of
SEOs’ Profit
onTotal Domestic
Income
2007
0.09
9.51
6.33
18.82
3.29
2008
7.78
8.24
5.23
22.92
2.97
2009
9.15
9.43
6.70
16.40
3.08
2010
9.15
9.53
6.67
17.01
3.03
2011
8.81
9.39
6.39
17.74
2.34
2012
9.69
10.21
7.13
16.95
2.31
2013
10.07
10.53
7.57
15.81
2.38
2014
10.30
10.70
7.64
15.58
2.61
Source: Processed from Realization of State Income (in million rupiah) 20072016http://www.bps.go.id
The development of the Indonesian Cigarette
Industry creates a dilemma. In one hand the cigarette
industry has contributed a substantial role of the
country's income, through cigarette taxes. Whereas,
cigarettes are harmful product for healthy, and can
cause death. The government should make efforts to
reduce cigarette consumption, but on the other hand
the government must maintain substantial income
from this industry (Muslim and Whardani, 2008).
Various efforts that have been done by the
government to reduce the level of cigarette
consumption and also maintain the contrys’ income
of this industry that affected on the number of
cigarette industry in Indonesia. The explanation of
Government Regulation No. 81 of 1999 on the
safeguarding of cigarettes for health article 2 stated
that smokers have a 2 to 4 fold risk for coronary
disease and a higher risk for death. Passive smokers
have a 30% greater risk of developing cancer than the
smokers themselves. Furthermore, the government
regulation also regulates the content of nicotine and
tar in the territory of Indonesia should not exceed 1.5
mg of nicotine and 20 mg of tar. To increase the role
of the government to maintain the role of the cigarette
industry sector to the national economy and to
increase public knowledge about the dangers of
smoking for healthy, it is necessary to analyze the
relationship between the basic condition, structure,
behavior and performance of the cigarette industry
with government-created regulations.
This study examines the effect of concentration
ratio, advertising intensity, price cost margin in the
long run compared to short-term using Price Cost
margin of the previous year (PCM t-1), government
regulation, sales growth on Price cost Margin in The
Indonesian cigarette industry.
Structure-Behavior-Performance (S-C-P)
The basic approach of industrial economic
paradigm emphasizes the relationship between
market structure and business behavior in
determining market performance. This relationship
simply describes the causal relationship of market
structure to behavior that affects performance
(Clarke, 1990).
The simplest relationship of the three SCP
variables is the linear relationship of structure affects
behavior then behavior affects performance. In the
SCP, the relationships of the three components affect
each other including the presence of other factors
such as technology, progressiveness, strategy and
efforts to drive sales (Martin, 1994).
The SCP approach by Don E. Waldman and
Elizabeth J. Jensen (1998) focused on Performance
Behavior (SCP) industry (shown in figure 1). Under
SCP basic conditions, the demand side is explained
by price elasticity variables, sales growth, and sales
methods. On the supply side focuses on technology,
and product durability. The market structure is
explained by the variety of sellers and buyers, product
differentiation, diversification, vertical integration.
Attitudes focus on collusion, merger, legal strategy,
advertising, and pricing and performance strategies
SEABC 2018 - 4th Sriwijaya Economics, Accounting, and Business Conference
694
measured by technological advances, and production
efficiency. Waldman and Jensen (1998) emphasize
that corporate policy actions are directly influenced
by government policies in the form of anti-trust
policies, regulations, taxes and other government
policies.
BASIC CONDITION
Demand Side
Price Elasticity
Subtitutes
Market growth
Type of good
Methode of purchase
Figure 1: The Framework of Structure-Conduct-Performance (SCP)
Source: Don E. Waldman dan Elizabeth J. Jensen (1998)
2 LITERATURE REVIEW
Martin (1979) examined a system of equations
that explained profitability, market concentration and
ad intensity using a 4 digit SIC Indsutri U.S sample
in 1967. The results showed that the intensity of
advertising, concentration, concentration of sellers,
and profitability were determined simultaneously.
The seller's concentration is explained in long-term
dynamic adjustment, and profitability and advertising
depend on the current level of concentration and the
variable that measures the demand side of the market,
when the seller's concentration is explained at a long-
term adjustment level.
The Pagoulatos and Sorensen (1981) study used
data from 47 food industries with a 4-digit SIC census
in 1967 examining the simultaneous relationship of
concentration, behavior and industrial performance.
The results of Pagoulatos and Sorensen (1981)
showed that the advertising intensity affects
concentration and profitability. In the food processing
industry, the intensity of advertising acts as an
industry barrier. Industrial concentration and
profitability are proven to significantly affect the
intensity of advertisements according to the
previously hypothesized feedback relationships.
Result of Pagoulatos and Sorensen research
(1981) for profit margin equation found price
elasticity of demand (EL) is important variable
GOVERNMENT POLICIES
Antitrust policy
Regulation
Taxes and subsidies
Trade regulations
Price controls
Wage Regulations
Investment Incentives
Eployment Incentives
Macroeconomic Policies
Concentration Ratio, Advertising Intensity, Sales Growth, The Government’s Regulation And Profitability In Indonesian Cigarette Industry
695
determine profit margin. Ratio concentration
coefficient (CR), demand growth (GVS), asset
intensity (K / S) results are significant and direction
is as expected. The import variables M / S and X / S
only slightly affect the earnings of local companies
and their positive direction is not as hypothesized.
The export-oriented variable is negative as expected
but the effect is also insignificant.
Although some theories in industrial economics
textbooks mention the effect of regulation on
industrial structure, industrial behavior and industrial
performance, for example in the book Industrial
Organization written by Waldman and Jensen (1998),
but in the research of Performance Behavior Structure
(SCP) in industrial sector manufacturing that has been
in the previous study, no one uses the regulatory
variables in his research. This study uses dummy
variable Reg1 (Regulation no. 81 of 1999) on
safeguarding cigarette language and dummy Reg 2
(Act number 32 year 2002) about broadcasting.
Hypothesis
The hypothesis of this research is the ratio of
concentration, the intensity of advertisement, the
previous year's performance, the regulation and the
sales growth affect the performance of the cigarette
industry in Indonesia.
3 RESEARCH METHODOLOGY
The scope of this study is limited to issues related
to the behavioral structure, performance and
government regulation of the cigarette industry in
Inodnesia. The variables used in this study
concentration ratio using CR4 to measure the
industrial structure, the advertising intensity of 4
firms included in CR4 to measure promotional
behavior, , cigarette industry sales growth and profit
of 4 companies included in CR4 to measure industry
performance . Data required is data from 1990 to
2013. Data for 2014 is not yet available in the Central
Bureau of Statistics (BPS).
This study uses secondary data of the cigarette
industry in Indonesia sourced from the Central
Bureau of Statistics (BPS) and the Indonesia Stock
Exchange (BEI). In this study the population used as
the object of research is the cigarette manufacturing
industry sector in Indonseia during the period 1993 to
2013. Selection of this sample is based on the
completeness of the data held. Secondary data
available will be processed to obtain the basic
conditions, market structure, behavior and
performance of the cigarette industry in Indonesia.
The model of this research is :
PCM =
0
+
1
CR
4
+
2
PCM
t-1
+
3
Iklan +
4
Reg
1
+
5
Reg2 +
6
GVS + v
i
.
PCM = Price Cost Margin
Advertising = Advertising Intensity
CR4
t
= Concentration Ratio
PCM
t-1
= Price Cost Margin previous year
Reg 1 = PP No 81 Year 1999
Reg 2 = UU No. 32 Year 2002
GVS = Sales Growth
4 FINDINGS
The model test results show :
PCM = 0.142641 – 0.000536CR4 – 0.751464IKLAN – 0.019394REG
1
+
(0,0522) (0,00005) (0,5276) (0,01447)
0.067699REG
2
+ 0.109153GVS + 0.277654PCM
t-1
(0,0212) (0,062822) (0,1712)
The Value of R2 = 0,56329
F Count > F Table (131,564 > 2,70)
The determination value of Price Cost Margin
(PCM) is 0.56329. The estimation results show the
variation of the changes. Price Cost Margin (PCM)
can be explained by variations of Industrial
Concentration (CR4), Ad Intensity, Dummy
Government Regulation No. 81/1999 (Reg1),
Dummy Law No. 23 of 2002 (Reg2), Sales Growth (
GVS) and Price Cost Margin last year (PCMt-1) of
56.3%. The remaining of 43.7% is caused by other
factors.
The simultan test result (F test) with alpha 0,05
Fcount test result > from F table, that is (131,564>
2,70), it means all independent variables have
statistically significant affected to variable Price Cost
Margin cigarette industry in Indonesia.
Concentration of industry (CR4) affects Price
Cost Margin (PCM) with negative direction and very
small coefficient value (-0.000536). Statistically, its
effect has not significant at 10% confidence level
with probability value 0,2626. This means that the
higher Concentration of Industry, the Price Cost
Margin (PCM) will decrease with a very small effect.
The direction of this relationship is supported by data
on income statistic (Return on Sales / ROS) four (4)
companies listed on the Indonesia Stock Exchange for
several periods which have declined pattern, and
there are the periods that the ratio of
companies’earnings shows a negative value.
Advertising Intensity indicates a negative effect
on Price Cost Margin (PCM) with a large coefficient
value (- 0.751464) and in statistically, it is not
SEABC 2018 - 4th Sriwijaya Economics, Accounting, and Business Conference
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significant at 10% confidence level, but significant at
20% confidence level, as indicated by probability
value of 0.1607. The estimation results indicate that
the higher the Advertising Intensity of Cigarette
Industry, so Price Cost Margin (PCM) will decrease.
This estimation results conflict with advertising
goals, as Advertising Activity is expected to drive
demand that will increase sales. However, if an
increase in the Intensity of Advertising accompanied
by an increase in the average cost of production which
is bigger than an increase in the selling price of the
product, then this will tend to encourage a decrease in
profits.
Government regulation (Reg1) number. 81 of
1999 on the Security of Cigarettes for Health turned
out to be inversely (negative) with the level of profit
of cigarette Industry. Partial model test results (t test)
shows a confidence level of 5% or 10% statistically
affect government regulation no. 81 of 1999 that has
not been significant to Price Cost Margin (PCM), but
it is significant at 20% confidence level. This
indicates by a probability value of 0.1863. These
results indicate that regulation about the maximum
threshold of nicotine, tor and other substances in
cigarettes that are caution to health affects the
declining performance of the cigarette industry.
The government regulation (Reg2) number 32 of
2002 on broadcasting is proportional to the level of
profit of the cigarette industry. Partial model test
results (t test) shows that a 5% confidence level of the
effect of this regulation on Price Cost Margin (PCM)
that is statistically significant. This indicates by a
probability value of 0.0024.
Law number 32 of 2002 concerning the
broadcasting in article 46 letter 3c. Mentions that
commercials are prohibited from promoting cigarette
smoking. Estimation results indicate an increase in
Price Cost Margin (PCM) after the issuance of the
Law. Despite the descriptive earnings of cigarette
companies listed on the Indonesia Stock Exchange
tend to be smaller, but total sales are increasing. This
means that government policy has not been effective
in reducing cigarette consumption. Law No. 23 of
2002 on broadcasting is statistically significant
affecting price cost margin in a positive direction.
However, the descriptive ratio of earnings in cigarette
companies listed on the Indonesia Stock Exchange
tend to decline.
Sales Growth (GVS) has a positive effect on Price
Cost Margin (PCM). Statistically this relationship is
not significant at 5% confidence level, but it is
significant at 10% confidence level with probability
value of 0,0886. These results indicate that an
increase in sales growth, will slightly increase the
Price Cost Margin (PCM) with a coefficient of
0.10953.
Price Cost Margin years ago (PCMt-1) has
positive effect of current period of Price Cost Margin
variable (PCM), and in statistic, this effect is
significant at 5% confidence level with probability
value of 0.1113. The estimation results show that
earnings expectation in PCMt-1 is able to boost the
current profit increase (PCM). These results also
suggest that earnings in the long run are more affected
than in the short term.
5 CONCLUSION
Price cost margin is more affected by the
concentration variable, advertisement, regulation,
and sales growth in the long term than the short term,
in meaning that there is more possibility of companies
in the cigarette industry in making the adjustments in
the long run so that the effect of concentration,
advertising, regulation and sales growth on earnings
can be more flexible / elastic in the long run.
Law number 32 of 2002 concerning on
broadcasting has positive significant effect on price
cost margin. This indicates that there is an increase in
advertising costs due to the law, and also followed by
an increase in price cost margin even though
descriptively the ratio of earnings in cigarette
companies listed on the Indonesia Stock Exchange is
declining. This is because the Law is not only
focusing the cigarette industry but regulating the
broadcasting for all industries.
Government Regulation number 81 of 1999
affects Price Cost margin and concentration of
industry with negative direction, but statistically it
has not been significant. The goal of issuing this
regulation is to protect people from the dangers of
smoking.
The observations in this study show that
regulations made by the government have not been
able to reduce the rate of sales growth, It’s mean that
cigarette consumption continues to increase even
though the growth rate is getting smaller. The policies
made by the government, both the limit of advertising
and the increase in excise rates, are only able to
influence the cost of producing cigarettes,
consequently even though the volume of sales
increases but the profits of cigarette companies are
getting smaller. The results of this study can be taken
into consideration by the government to increase
cigarette excise rates, and make new, more effective
policies reduce the volume of cigarette consumption.
Concentration Ratio, Advertising Intensity, Sales Growth, The Government’s Regulation And Profitability In Indonesian Cigarette Industry
697
Test results of the effect of Advertising Intensity
on Price Cost margins have a negative direction that
is not significant. This result is contrary to the
purpose of advertising behavior. This article
examines the influence of advertising in the same
period on profits. the following research can consider
the effect of time to test the effect of advertising on
profit.
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