Does competition exist in local industries?

Light on competition
Almost every set of recommendations for improving the economy of developing countries contains references to competition.  Competition in the world of business is often a hot topic that is generally regarded as a panacea for removing inefficiencies in production and improving the poor performance of economies. This perspective about competition is linked to the assertion that competition is the driver of innovation and productivity; the production of new products of better quality that utilize less and better resources than before. Competition has emerged also in discussions about international trade as a defence against trade restrictions.  Those who sing the praises of competition claim that it facilitates greater equality of opportunity and where it prospers it can alter the social structure of a society.  Newly-minted owners (often termed the nouveau riche) of successful businesses can change social status while others can fall from grace and fade away from social limelight.  Guyana has hopes of reducing poverty and providing a good life for all Guyanese.  This principle of the government can be interpreted in many ways with most thinking of having greater amounts of wealth and enjoying better living conditions.

One must ask the question if wealth creation and improved living conditions could be achieved without a more competitive business environment. This article seeks to explore possible answers to that question. Of necessity, the article will be presented in more than one part in light of the need to discuss both the existing and desired competitive environment.

Competitive markets are not achieved automatically, especially those that involve the use of complex technologies and sophisticated business processes. In many instances, government has to play a role in helping markets to become and remain competitive.  One ought not to ignore the need for government’s intervention with the use of competition policy to enable small and medium-sized enterprises to survive in the Guyana economy.  Self-preservation is nature’s first law, and established firms with dominant market share try to retain their elite status by finding ways to keep out new competitors. Acutely aware of this possibility, Guyana joined other countries in adopting a law on competition.  In Guyana’s case, the law is called the Competition and Fair Trading Act 2006. The relevance of this piece of legislation to bringing about the good life will be discussed in further detail later in the article.

As one proceeds, the question can be asked, what is expected in an economy when competition exists. From an economic perspective, the concept of competition is defined as the rivalry among sellers who are trying to achieve goals such as increasing profits, sales volumes, and market share by creating a suitable mix of the marketing elements of price, product, place and promotion.  This mix is referred to as the four Ps and is familiar to many. This economic role of competition is to discipline the various participants in economic life to provide goods and services skilfully and cheaply. Of the four Ps then, the one that matters most in competition is price.  Competition has the effect of lowering prices and making it possible to increase consumer surplus. It also makes it possible for more people to enter the market and enables them to enjoy access to goods and services that they otherwise would not have access to. An important metric in this regard is inflation which Guyanese tend to keep an eye on through the use of the urban consumer price index.  Inflation shows the general rise in the price level and too steep a rise in the index with staying power could signal a shortage of supply. That shortage could be the result of an emerging situation in which less competition is occurring somewhere in the economy.

The spectrum of competition in Guyana stretches from one extreme to another. On the more favourable extreme lies a market structure that reflects perfect competition.  In such a perfect world, all market suppliers are price-takers, a situation where suppliers cannot control market prices.  In addition, all suppliers have a relatively small market share and sell identical products, buyers have perfect information, and both buyers and sellers are free to enter and exit the market. As low as they might be on the ladder of business, the pavement vendors and market vendors are the closest things to perfect competition in Guyana in the retail trade.  The plethora of food vendors, rum shops and beer gardens is also part of the highly competitive environment.  The passenger-service industry with its large supply of willing drivers and vehicles is also a competitive industry at least in the Georgetown and suburban areas. The common thread among these vendors and transport providers is the ease with which anyone can enter the market and the very simple technology that is used to construct many of the inelegantly-looking business spots in the various markets.

At the other extreme is the monopoly. In a purely monopolistic market, the firm is the sole source of a product, a price-maker, resulting in prices being higher than they ought to be since the monopolist will seek to maximize profits too.  As noted earlier, firms try to retain their elite status by erecting barriers to entry into the market.  Where that risk exists and national welfare could be diminished significantly, Government tends to step in.  It is possible to identify two enterprises controlled by the government that play such a role. One is the Guyana Water Inc and the other is Guyana Power and Light (GPL).  Without the aid of any public records, one has to scour the business landscape to find a private firm whose entire business model represents a monopoly situation in Guyana. Such a search would produce the National Milling Company of Guyana, Inc (Namilco), a foreign-owned company that produces flour, as one example.  As tempting as it is, one is not ready to include the oil industry as yet in this discussion.

In between the two extremes of imperfect markets are duopolists and oligopolists. These investors represent varying degrees of market imperfection with risks to competition. Even though duopolists and oligopolists can compete with each other, there is greater fear that collusion could occur between them. Generally, fears about price-fixing, vertical agreements between suppliers and distributors that foreclose markets to new competitors and other cartel arrangements have led to distortions in price that made it difficult for poor citizens to get out of poverty. One study found that developing countries which imported simple products like vitamins and citric acid were overcharged billions of dollars as a result of price-fixing by private companies that exported the products.

A duopoly market consists of two dominant firms even though there might be several smaller players operating in the industry.  While further study of the companies in Guyana that fall into the duopoly and oligopoly categories is to be undertaken, one can only use prima facie evidence to find examples of companies that can be classified accordingly.  Duopolies are found in all sectors and industries. In the services sector, there are Digicel and GTT in the telecommunications industry.  There are Banks DIH and Demerara Distillers Limited in the spirits industry within the manufacturing sector.  In the mining sector, there are RUSAL and BOSAI in the bauxite industry.

An oligopoly market is dominated by a small number of large firms, each of which has a relatively large market share. While each firm does not have as much market control as in the case of a monopoly, it has the chance to prevent new firms from entering the market. As in the case of a duopoly, a market that has many firms, but the top five produce most of the industry’s output, is regarded as an oligopolistic market. In the case of the oligopoly, there are six companies in the banking industry in Guyana that make that industry qualify as an oligopoly and five major players in the shipping and port operation industry in Guyana that enables that industry to be classified similarly.

The preceding discussion reveals that in looking at the concept of competition, the subject of market structure must be addressed.  Market structure refers to the number of firms in the market, their market share, and other features affecting the level of competition in the market. These structures are classified based on the presence or absence of competition. When competition is absent, the market is said to be concentrated. Perfect competition is a market structure that encourages more competition and less concentration while monopolies, duopolies and oligopolies do not encourage much competition and therefore tend to be more concentrated. It is this latter reality that encourages the call for greater competition in industries.  A study conducted by the Organization for Economic Cooperation and Development has shown that competitive markets enable a country to use its resources with the best effect in the production of goods and services.  With competitors breathing down their necks, businesses strive to improve their production and distribution performance.  They move to use better technologies and come up with new ways of doing business.  There is concern that not enough of this is happening in Guyana and firms that are perched at the top of their industries have very little incentive to improve and expand output. (To be continued)

 

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