By Manan Vyas
Free market enthusiasts (like myself) believe that unfettered markets will deliver the best results for the consumers and economy alike. Private companies competing for profits will strive to deliver the best services at the lowest cost. Critics of free markets point out that if private companies acquire monopolies they will be in a dominant position and may eventually end up exploiting consumers with high prices and poor services. This is possible in the case of a government mandated monopoly – for instance, if a single company is given a monopoly by a government, eg. water privatisation in Bolivia, and no other private service is allowed to compete (or the barriers of entry are unreasonably high). In such a case, the private company could potentially exploit customers. However in a free market where companies are allowed to freely enter and exit markets, monopolies and oligopolies are not sustainable in the long run.
Why is this so? In a competitive market, private companies seek consumers that are under-served, since they present a potential for profit. The existence of a free market where companies are allowed to enter the market and compete at any time to serve the needs of the same set of customers will never allow sustainable monopolies. Let us examine the most feared situation: The OPEC cartel achieves a market share of 95% of the world oil market and essentially has a highly dominant oligopoly. On the surface it may appear that the cartel would be in a situation to exploit the consumers – they increase prices drastically. However at this point, private firms over the world believe that there could exist a gap in the market, that the consumers’ energy needs could be satisfied at a lower rate through non-petroleum alternatives. This will lead to a global race for alternatives – Solar power, nuclear power, wind energy, hydro-electric energy and all alternate non-petroleum industries will see a surge of investment essentially because the high prices set by the cartel have presented an opportunity. The demand for electric cars would go up drastically, thereby reducing the number of petrol/diesel cars on the road, thus decreasing demand for petroleum. Similarly, other petroleum consuming activities would slowly and surely start moving away from petroleum. The point being, even if the OPEC cartel has acquired a monopoly over petroleum, if the consumers are dissatisfied with the value creation, there will always exist opportunities for other private companies to satisfy these needs more efficiently.
Let us examine a real life example of this: The setting: The Delhi University North Campus. Thousands of students emerges from the metro station at North Campus each morning. To reach their respective colleges, they have 3 main options – Walk, take the campus bus or take a cycle rickshaw. Walking takes time while the campus bus service is crowded, not regular enough and does not drop at the very gate of most colleges. Cycle rickshaws by default emerge as the best option. There are a very large number of cycle rickshaws waiting to serve the students, with each driver aiming to attract the student’s patronage. This might lead one to believe that this would be a highly competitive market that consumers could exploit to derive at the lowest prices. Unfortunately, the cycle rickshaw drivers banded together to form an exploitative cartel. Rates went up by anywhere between 50 to 100% at the start of the new academic year. “Aaaha! This is what happens in unregulated markets. The government is needed to break monopolies”, would be the reaction of one that does not have faith in the power of free markets.
Clearly, there existed an opportunity. A large group of consumers was dissatisfied with the high prices. And voila, the free markets answered.
The battery operated rickshaw (pictured to the left) costs Rs 1,10,000. It seats 5, is noiseless, smooth and reasonably quick. Sensing an opportunity, manufacturers of battery operated rickshaws started aggressively marketing their products. Entrepreneurs stepped in to ease the capital gap: They would buy these rickshaws and hire them out for Rs 400 a day. Other drivers would buy them outright for Rs 1.1 lac. Instead of the Rs 20 that cycle rickshaws were charging, these charged only Rs 10. The lower prices combined with greater comfort meant that these battery operated rickshaws were an instant hit. Students started ignoring cycle rickshaws and gravitated towards these. Sensing the detrimental effects of the competition, the prices charged by cycle-rickshaws are now on a downward trend.
What is interesting to note are the profits for cycle-rickshaws: Rs 1,000 to Rs 1,200 a day. Operating costs are almost negligible as the charging of the battery costs less than Rs 50 per day. So operators of these rickshaws are making a monthly profit of approximately Rs 30,000 a month. Even those who take these up on rent are making a hefty Rs 18,000 a month, for what is essentially a semi-skilled job. These high profits are likely to attract competitors. Each day, one can observe that an increased number of battery operated rickshaws are operating at the North Campus metro station. Competing for the same share of customers, the large pool of cycle-rickshaws and battery operated rickshaws will all need to lower their prices. With a larger number of players in the market, the chances of a collusive oligopoly are reduced substantially.
Therefore what has been observed is that despite the formation of a monopoly, if there is a group of dissatisfied customers, over a period of time these customers will attract a new group of private players that are willing to serve them at better terms. For this to happen in reality however, what is essential are completely free markets that allow both painless entry and exit. The Delhi University cycle rickshaw monopoly has been broken, consumers have benefited and free markets have notched up yet another victory.