In a previous article, we pointed out that apart from the devaluation and flotation, of a currency, the level of prices in an economy could be due to other factors such as the existence of monopolies. Today, we must look at the market power exerted by an oligopoly.
An oligopoly is a situation where a product or service is produced and marketed by a few firms for example 60 percent or more of the product may be supplied by only three large firms. When the service is supplied by only two firms, such as the daily newspaper in Malawi, we speak of a duopoly.
Members of a monopoly restrict production and supply of a product to maintain prices well above what would be determined purely by the forces of demand and supply. The oligopolists do not sign an agreement to charge the same price. Theirs is a gentleman’s agreement not to spoil the market.
Usually, one of the firms is a price leader by virtue of being the biggest. The price it charges acts as a signal to other firms what they too should charge. If one of them in order to entice more customers to itself reduces its price, the others react fiercely by reducing their own price even lower, thereby driving the offender out of business. When this is achieved ,the biggest firm and other firms restore prices to their old level.
Where firms agree to charge a higher price, without actually entering into an agreement, this is called collusion by those who are critical. The collusion may be reached at banquets or the marketing managers of the firms may opt to give each other a call and the conversation may go something like this: “If you raise your price by 20 percent, we shall also raise ours by 20 percent.”
Oligopolies hurt the interest of consumers in two manners. They keep prices artificially high and they operate inefficiently. Because they operate in markets where they face no major threats, they are less inclined to engage in research to discover more efficient methods of production and selling. Instead, they persistently put up aggressive marketing and advertising programmes. The costs of these campaigns are included in the pricing of their products or services and so prices remain dangling above the equilibrium.
Monopolies and oligopolies are not necessarily immortal. They get stultified or even destroyed by legislation. In the United States, they have what they call the anti-trust legislation which forbids certain types of mergers.
Some oligopolies and monopolies are weakened if not destroyed by the growth of technology. Time was when the post office was the sole operator of the telegraph system. Recently, I visited the Blantyre Post Office and requested for a telegraph form to fill, I was told the service had been wound up in view of the mobile phones and e-mails. This is an example of a monopoly being brought to its knees by technology.
Monopolies and oligopolies also get weakened by foreign competition. The automotive oligopoly in America (General Motors, Ford Motor Company and Chrysler) was shaken down by imports of Japanese cars.
In which direction are prices to go in Malawi during the next few months? The harvest of maize might contain the inflation only briefly because of the impending general elections. Some people either because they have short memories or are just ignorant of our history, speak of the present inflation as unprecedented. This is nonsense.
In order to win the 1994 elections, the MCP government compelled the Reserve Bank to lend it millions of kwacha. The UDF inherited inflation well about 80 percent. It took almost a decade to reduce inflation significantly because as the elections approached, the UDF government also indulged in the same practice of primitive banknotes.
I will be surprised if the PP government will not succumb to the temptation to finance election campaigns by “borrowing” funds from the central bank. And if that happens, rest assured inflation will go up, not down.