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Microeconomic analysis of price-fixing conflict by oligopolists [opinion]

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By Sagir Ibrahim

AROUND October 1929, values of stocks in the New York Stock Exchange, NYSE, market dropped to an unprecedented record level. Within three days, many investors lost about $5 billion. Towards the end of the year, major banks and investment companies lost about US$11billion.

That loss led to closing of factories and laying off of their workers, as economists forecasted more hard times ahead. But, in places like Iowa and Midwestern states, economic hard times were already in place ten years earlier.

During World War 1, the central government guaranteed farmers of high prices for their crops and livestock farmers took advantage of that and increased their agricultural output, and expanded their herds. The farmers gained a lot from that favour.

In the early 1930s, the world witnessed the aftermath of the World War I, which was known as “The Great Depression.”  During that period, the world witnessed a drastic fall in all economic activities. Factories were closed and many economic entities collapsed.

Prices of goods and services skyrocketed, unemployment was high due to loss of jobs. During that period, classical economists were the theorists that authorities resorted to for economic advice and plans. As such, they promoted the idea that the economy would move back to equilibrium position even without governments’ intervention by what they termed “invisible hands”-forces of demand and supply.

John Maynard Keynes was a radical economist who did not subscribe to that economic idea of the classical economists. He it was who guided the then US goverment out of that great economic depression.

In his response to the idea of self- adjustment of the economy, he opined that “in the long run, we’re all dead”; as such, he wanted the authorities to do away with the idea of free market economy, and intervene to stabilise prices and supplies from disequillibrium and correct the economic abnormalities.

Fortunately, the authorities took to his advice and acted accordingly. With his advice, they successfully overcame the great depression.

In Nigeria, we’re operating oligopoly where few firms produce for millions. They dominate the markets, determine the supplies in low quantity and also determine the price margin.

While in real monopolies, monopolists control only one tool: either price or supply; but here they control both. And this is as a result of huge favours they enjoyed from the authorities through policies they lobbied. That’s why we are in a perpetual inflation as huge amount of money is chasing few goods produced by these oligopolistic firms.

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Economics as a science is divided into two categories: Microeconomic and macroeconomic. Microeconomic studies individual households and business decisions. It also focuses on demand and supply, and other variables that determine price levels. In a nutshell, microeconomics tries to analyse human choice, decision and the allocation of resources. On the other hand, macroeconomics  studies the decision made by government as a whole, such as decision of a government in regards to inflation, price stability, unemployment and so on.

Macroeconomics takes into account the economy as a whole. As such, it takes a bottom line approach to determine the course and nature of an economic phenomena. Recently, a competitive -war broke out between the two dominant producers of the Nigeria sugar industry, Dangote and BUA.

In microeconomics, the war is known as “Price War”. It is a situation where two rival firms reduced the price of their commodity to increase their revenue and market share. Normally, they do that for a short run. Whenever the war is intense, the rival firms usually react by setting a price lower than the price set by the other rival firms.

They keep on with that until they reach a point known as ‘perfect competitive price’, where none could either reduce or increase price. And if one increases his price, he will lose his customers to his rival. And if he reduces his price, he will surely incur loss.

So, no matter what transferred, the consumers are the gainers. Surely, they will only go for a commodity with a lower price, since  the commodities are identical and can serve the same purpose.

But, did the action of BUA emanate from his empathy for the poor? Probably, and from the microeconomic point of view, no; but only a strategy employed to gain more dominance in the industry, and also, to increase revenues and market share. Dangote Group, in their quest to retaliate the action of its rival, filed a petition to the Minister of Industry, where it accused its rival of operating with impunity, acting contrary to laws laid by the National Sugar Policy by selling its products locally instead of otherwise. As such, it wants the firms of its rival to be closed! This is purely a case of dominance.

If the firms truly want to retain their hard-earned reputation as business-philantropist in order not to lose their customers, they must act wisely. This is because a mistake at this stage will surely haunt them in the future.

Price war is nothing new in free market economy. It is just a strategy employed for industry dominance. At the end, government must come in to address the issue in contention in order to safeguard national development. By so doing, it will be correcting inflation, generating employment and stabilising the market/economy, thereby creating an enabling environment for other investors in the sector to participate and compete in the industry.

By doing this, it will create more job opportunities and stabilise the price of commodities since each of the firms would be wary of increasing its price to avoid losing customers to their rivals.

Ibrahim, a student of Bauchi State University, Gadau, wrote via:

Vanguard News Nigeria

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