Market Competition: the Shek Tong Tsui fish market

Market Competition Fish

To what extent does the Shek Tong Tsui fish market illustrate perfect market competition

Abstract

This essay analyses to what extent the fish market illustrates perfect competition. The results from the research of the prices paid by individual buyers at the Shek Tong Tsui fish market in Hong Kong. As assumptions, the fish market is a highly competitive market in which there should be no predictable price differences across customers who have equal price elasticities of demand.

The results obtained from this investigation indicate that different buyers pay different prices for fish of identical quality. For example, some Asian buyers may pay less for fishes than white Caucasian buyers, a result which is inconsistent with the model of perfect competition. In reality, there is no industry that falls exactly in perfect competition but there are some industries that come close such as the fish market industry.

Introduction

To economists, it may seem that when we have a large centralised market with informed buyers and sellers, there should be a very competitive market. However, fish is a highly differentiated product to sellers. There may be not enough information for buyers because they may look the same to them. Buyers will often wish to examine the fish themselves to check for quality or have their agents do so before purchasing.

The centralized market performs an important function in matching fish to buyers since every customer have very different price elasticities of demand. The buyers at the fish market will act as agents for consumers with different elasticities of demand, from restaurants in the housing district selling fish ball noodles, to expensive commercial high class restaurants selling their chef recommendations, to fry shops serving fish sandwiches, to suburban fish retail outlets. The high level of product differentiation in the fish market can lead to patterns of behavior that suggest a market that is close to perfect competition.

The stocks usually arrive at the market at dawn, freshly delivered from the wholesaler to the stall. The Shek Tong Tsui market opens up at 7:00am in the morning and closes at around 8:00pm.

Pricing at the Market

The quantity supplied of fish brought to the market is determined by many key factors. The weather is one of the most important determinants of supply since strong, powerful winds and high waves will make it difficult to catch fishes. The quantities may face downfall and prices may rise when there are storms.

While quantities rise, the prices fall in good weather. Without centralisation, it may be unclear whether the price response could have been as effective for demand to match supply as buyers might have suspected gouging on the part of the sellers if prices were not easily comparable.

From observation, the prices of the fishes are usually at its highest during the early morning when the market opens this is because the fishes are at its freshest condition. While the prices of fishes are at its lowest during night time when the market is about to close because the seller wants to get rid of the fishes that are not fresh anymore. In addition, the stall keepers seem to price differently by nationality for example, they charge more on Caucasians then they charge on local people.

Data Analysis

Primary research is conducted through observation of the market and secondary resources such as the news to see whether it affects the prices of the different stalls and also determining what market does the fish market lie on. Data will be collected during the summer. Observations may include daily prices and average daily prices of a few stall on a certain type fish on every one or two days for around one week.

Pricing of the Golden Thread

As we can see from the wholesaling price graph, before Typhoon Kammuri landed on Hong Kong (around 7am on August 5^th), the price of the Golden Thread was at its highest ($36/Catty) simply because when there is a typhoon there will be no fishes available. We can therefore conclude that the weather will affect the price and the sellers will try to raise the prices when there is a limited amount of stock.

Assumptions of Perfect Competition

Perfect competition is a description of a market structure whose assumptions are strong and highly unlikely to exist in the real world markets. In reality, most markets are imperfectly competitive. However, there is some understanding of how price, production output and equilibrium is established in the short and long run that makes it a perfect competition.

The industry is made up of a very large number of firms. Each firm is so small, relative to the size of the industry so one firm’s action will not affect the supply curve of the industry as well as the price of the product. Individual firms have to sell at whatever price is set by demand and supply in the industry as a whole. Stalls in the fish market are “price-takers”.

Firms all sell “homogeneous” goods so it is not possible to distinguish between a good sold in one stall and a good sold in other. There are no brand names and there is no marketing to attempt to make goods different from each other.

Firms are completely free to enter or leave the industry in other words there are no barriers to entry and exit. All sellers and consumers are fully aware of prices in the market, the quality of products, and the availability of the goods.

In Figure: 4, it shows that the price is set by the demand and supply curve of the industry. An individual firm does not have enough power to change the market price so therefore price is constant on the graph on the right.

• The firms all sell exactly identical products. Their goods are “homogeneous” whereas it is not possible to distinguish between a good produced in one firm and a good produced in anther. There are no brand names and there is no marketing to attempt to make goods different from each other.

• Firms are completely free to enter or leave the industry. This means that the firms already in the industry do bit have the ability to stop new firms from entering it and are also free to leave the industry. In other words, there are no barriers to enter or exit the market.

• All producers and consumers have a perfect knowledge of the market. The producers are fully aware of market prices, costs in the industry and how the whole market works. While the consumers are fully aware of the prices in the market, the quality and the availability of the products.

• There are no externalities arising from production or consumption which lie outside the market.

Price elasticity of demand (PED)

Price elasticity of demand is a measure of how much the quantity demanded of a product changes when there is a change in the price of the product. This can be the determined by the data collected. Stalls in the market produce homogeneous products that are perfect substitutes for each other. This means that stalls are suppose to be price takers and face a perfectly elastic demand curve for their product (PED value of infinity). But for the fish industry, this is not the case.

This can be calculated with the formula:

• When Elasticity of Demand > 1, elastic

• When Elasticity of Demand < 1, inelastic

• When Elasticity of Demand = 1, unitary

There are factors which determine elasticity of Demand and these include:

• Degree of necessity of the product

• The availability of close substitutes (more substitutes means more elastic)

• The proportion of income which a product takes up

• If the product has any addictive properties

A questionnaire will be set up to give a clearer picture on what consumer demand is like on fishes, please see Appendix for questionnaire. A total number of 100 people were surveyed and some of the results were gathered up and put into pie charts for analysing.

Long Run

With the collected data, I will be able to show whether or not it is acting in the consumers’ interest or their own profit maximizing gains. In the long run, stalls in perfect competition will make normal profits. This is because, even if they are making short-run abnormal profits or short-run losses, the industry will adjust with stalls entering or leaving the industry until a normal profit situation is reached.

Long run equilibrium in perfect competition:

Figure: 8

In Figure: 8, the firms are making normal profits in the long run. They are selling at price P, which is taken from the price that is set by the market. The marginal cost (MC) is equal to the marginal revenue (MR) so there are at profit maximisation when producing at quantity q. At that output level, we can see that the price is equal to the average cost (AC) so therefore they are making normal profits. We can conclude that the firms are acting in the consumers’ interest while also gaining normal profits.

Assumptions of oligopoly

An oligopoly is a market structure dominated by a few firms and has a high level of market concentration, each of which has some control on the whole market. However, oligopoly is often best defined by the behavior of firms acting within a market rather than its market structure.

Price leadership – tacit collusion

Collusive oligopoly exists when the firms in an oligopolistic market collude to charge the same prices for their products, in effect acting as a monopoly, and so divide up any monopoly profits that may be made.

One of the behaviors in an oligopoly is price leadership which is when a firm has a dominant position in the market and smaller firms with lower market shares follow the pricing changes prompted by the dominating firm. If the dominating firms in a market are changing prices in the same direction, it may take some time for price changes to emerge which might cause the consumers respond with a change in demand.

Firms who market to consumers that claim to be matching the lowest price in a given geographical area are engaged in tacit collusion. Tacit collusion occurs where firms undertake actions that are likely to minimise a competitive response. Consumers will not be benefiting from tacit collusion because there is little to no competition in the market.

Explicit collusion under oligopoly

It is often observed that when the market is dominated by a few big firms, there will always be motivations for the seller to reduce market uncertainty and engage in some form of collusive behavior in order to control the market. When this happens the existing firms may decide to form price fixing agreements or cartels, which are aimed to maximise joint profits and act as if the market was a pure monopoly. However, this behaviour is illegal in some countries such as the United Kingdom, but there is little evidence to prove that a group of firms have deliberately chose to join together in order to raise prices and control the market.

Price fixing

As stated before, collusion is explained by a potential to achieve joint profit maximization for the firms within a market, which may avoid the problems of price and revenue instability. Price fixing represents an attempt by suppliers to control the supply and fix price at a level close to the level we would expect from a monopoly.

In order to fix the prices, producers in the market must be able to control the quantity supplied in the market. The distribution of the cartel output may be allocated with the use of an output quota system or some sort of negotiation. Although the cartel as a whole is maximising profits, individual firm’s may see their output quota unlikely to be at their profit maximising point.

Putting the fish market in an oligopoly or perfect competition

Clearly the assumptions of pure perfect competition do not hold in markets such as the fish market in this case. Some suppliers may choose to exert some control on the quantity supplied and may exploit their monopoly power, but each individual stall in the market is so small that changes they make will hardly have effects on the whole industry.

On the demand side, some consumers may have monopolistic power against suppliers because they make up a high percentage of the total demand such as restaurants. There are nearly always some barriers to the contestability of the market and far from being homogeneous, there is no such thing as zero barriers to entry. In reality, most markets are filled with heterogeneous products due to product differentiation, however in this case fishes are more to the “homogenous” side.

Consumers nearly always have imperfect information and the effects of persuasive marketing and advertising may affect their preferences. For example, the stall keepers are able to charge higher prices on foreigners than the local people due to the lack of information of the market price. In every industry, there will always be asymmetric information where the seller will know more about the quality of the product than the buyer.

So when we put the fish market in an oligopoly or perfect competition, we will be able to see that the market is closer to perfect competition than an oligopoly. The fish market meets most of the criteria of being a perfect competition such as having many firms in the market; all the firms are small with very little persuasive power on how the market operates and selling homogenous products. However, there is no perfect information and there are a few barriers to entry.

The fish market meets some of the criteria of being an oligopoly such as entry barriers and interdependent decision making where the firm will react to changes of its rivals. However, there is no product branding in the fish market and there are some price competition between firms because they want to make profits.

We can come fairly come close to perfect competition in the fish market but in reality, there are nearly always barriers to pure competition.

Conclusion/Evaluation

In conclusion, to an extent, the fish market lies closely to a perfect competition market. The fish market does have characteristics of both an oligopoly and a perfect competition. But it is obvious that the fish market is closer to a perfect competition due to the fact that the market has many firms and all of them are small in other words there is no individual firm that can have a large impact on the market. However, there are some characteristics of an oligopoly such as reacting to changes when rivals make a move.

From my close observation and research, I can conclude that there is no non-price competition involved in the Shek Tong Tsui fish market. All firms are in the market as individuals which act towards the consumers’ interest.

Bibliography

Blink, Jocelyn and Ian Dorton. Economics Course Companion. Oxford University Press, 2007.

McConnel, Campbell R. and Stanley L. Brue. Microeconomics. New York: McGraw-Hill Inc., 1996.

Fish Marketing Organization. 2006. 20 July 2008 <http://www.fmo.org.hk/>.