Level of prices and market power

Commentators on the economy give the impression that the present level of price is due solely to the devaluation and floatation of the kwacha. They are mistaken and they mislead others.

At any time the level of prices in an economy is much influenced by the market structure. That is whether a product or service in the market is sold by numerous sellers perfect competition only one seller (monopoly) or is dominated by a few gigantic sellers and producers (oligopoly).

We will have a look at the characteristics of competition, monopoly and oligopoly alternatively.

A market structure in which the seller cannot influence the price of his product but must charge the price that other sellers are charging is what economists call competition. This market structure has the following features:

1. Many small buyers and sellers

2. A standardised product

3. No barriers to entry or exit

Where a product is sold by many sellers and the product sold by the one individual or firm is identical with that sold by another, competition is bound to exist. Besides, in a competitive market there are no barriers to entry or exit. Whoever wants to start that kind of business does so, subject only to the business licence. Anybody who is operating in that market may give up doing something else.

In a competitive market a firm is said to be a price taker. The most common sector of the market in which there is almost perfect competition is agriculture. The maize or beans sold by one farmer is generally identical with that which another sells. Visit a produce market in one of the urban centres and observe what vendors are selling. Because their commodities are identical anyone who raises prices for his/her merchandise is soon deserted by customers.

This kind of market structure works very much in favour of the buyer and consumer because prices are just above the costs of production. There should generally be a policy of encouraging rather than discouraging competition.

At the opposite end of perfect competition is monopoly. A monopoly is a market with only one seller of the produce. The single seller is called a monopolist.

The founder of modern economics Adam Smith of Scotland wrote:”The monopolists by keeping the market constantly under stocked by never fully supplying the effectual demand, sell their commodities much above the natural price.”

The product made by the monopolist has no substitute; the monopolist therefore has got market power which is defined as the ability of an individual firm to influence the market price. The monopolist is a price maker not a price taker.

The following are the features of a monopoly:

1. It is a single firm

2. It offers for sale a unique product that has no close substitute

3. Its market has strong barriers to entry

Barriers to entry

The main reason that some markets are dominated by a monopolist is that there are barriers to entry into that market.Some barriers are natural while others are artificial.

The following are the most common barriers to entry under a monopoly:

1.Economies of scale. This means that a large amount of the product can be produced at a lower cost only by a highly capitalised firm or a large amount of initial capital. The making of cars and aeroplanes is a good example. Not many people can raise capital to start a firm of their own to make cars where other cars are already being manufactured. Capitalisation in other words is prohibitive.

2. Exclusive franchises. A government grants a licence to only one firm to do certain kind of business. The first bus company to operate in Malawi was the Nyasaland Transport Company (NTC). The government gave it an exclusive licence. Exclusive franchises are also enjoyed by electricity corporations and water boards.

3. Control of essential raw materials. A firm that is in control of a scarce raw material can deter others from an industry that uses such materials. If tobacco were grown by one firm and that firm formed a cigarette manufacturing subsidiary it could refuse supplying raw materials to its rivals.

4. Patents. Patents are licences given to inventors of new products. It requires a lot of time and energy and expenditure to invent a new product. The government gives the inventor an exclusive licence to develop and sell that product for some years so that he benefits from his genius.

5 Product differentiation. This differentiation takes the form of branding a product, giving it a special name so that no one else may use that name in selling his product.

We will look into oligopolies and other forms of monopolies later.