The Moorish Wanderer

The Case Against Monopolies

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on April 26, 2010
I speculated earlier on the need for a hypothetical government to nationalize private monopolies in order to crush any ‘financial coup d’état’, under the condition that theses trusts should be re-privatized in smaller bits, in order to get the competition going (I thought something of 4-5 years is a good reference) However, I failed to prove my point (rigorously I mean) And indeed, how do we assess the previous hypothesis? How do we prove that 

a). these companies enjoy private monopoly over some, not if all, vital consumption goods

b). these goods are quite important to Moroccan households, who are very price-sensitive to any changes.

Before that, I will just develop some basic microeconomics theory on Monopoly. The starting point is about how a company charges the ‘market price’, if it has any grip on it. We do assume that prices are exogenous to any market player; it seems that price-taking process, the core structure of market economics, is ignored by the companies, though they cling to the very idea of open markets. That’s a contradiction in terms, since a true market economy is not rent-providing, or even profit-providing in market equilibrium.
Coming back to pricing process: in an ideal world, the firm adapts itself to the market price by adjusting to its marginal cost (i.e; with reasonable extrapolation, the marginal productivity of its inputs). Second year economic students do know about that graph I believe:

As long as market price is above the marginal cost, the firm will produce till it reaches the optimal* quantity (which, in comparison to other market situation, is the highest) for a social equilibrium.

You know what? This has never existed, though many economic and financial models base their assumptions on a near-perfect market structure (after all, Hedge funds were once described as ‘market clearing mechanism’, enabling security pricing to be more efficient). Nonetheless, in a true market-competitive structure, a single company has a very small margin on prices and quantities, so they do take price market as a given or rather, in their majority, follow a ‘signal’ (another subject to be discussed in another post perhaps)
The Moroccan economic structure for the described goods is closer to what A. Marshall described as a rent economics. He had some interesting thoughts on the matter: “It has never been supposed that the monopolist in seeking his own advantage is naturally guided in that course which is most conducive to the well-being of society regarded as a whole, he himself being reckoned as of no more importance than any other member of it. The doctrine of Maximum Satisfaction has never been applied to the demand for and supply of monopolized commodities.” He then goes on: “The prime facie interest of the owner of a monopoly is clearly to adjust the supply to the demand, not in such a way that the price at which he can sell his commodity shall just cover its expenses of production, but in such a way as to afford him the greatest possible total net revenue.”

Clearly, the academic definition of a monopoly is quite revealing: there’s nothing beneficial for a society from a monopoly –save perhaps for the monopolist themselves-, in that sense that they capture the consumers’ surplus (the premium between the market price and their maximum reserve price), the captured surplus is therefore a rent, which is in turn spent as dividend –rather than investments as we are ld to believe in our ‘national’ economic model- to the wealthy.

There’s of course a fine line between a ‘Marshallian’ pure economics and the actual and factual economics we are dealing with. In facts, absolute/pure monopolies do not exist. However, in a more refined economic theory, duopoly and strong-form oligopolies do replicate the same pricing methods, but in a two-times model. I am of course referring to the Cournot/Stackelberg models, for which we need to understand the academics underlying before we can go further: indeed, aggressive moves on prices at a particular market does not necessarily mean competition (and therefore, outcomes to the benefit of consumers) since the tides could change to a much less price-friendly market structure. Basically, the Cournot model starts with the ‘best response’ strategy each company draws up against their competitors, they end up producing with monopoly quantities (because of their respective strategies) each firm enjoys a captured portion of total demand, but cannot charge it with the full marginal revenue, so they end up charging the pure competition market price, namely their marginal cost.

The general assumption is that all competitors enjoy similar cost structures, and subsequently, the same marginal cost (save for the fixed cost) otherwise; the one with the lowest cost takes it all. Despite its simplistic assumptions, the model could, for the available data, provide interesting insights on how particular markets are doing, and how some companies are taking advantage of it.

The Stackelberg model is even more accurate; the dynamic dimension is more important, and in our case, suits perfectly the edible-oil market: there’s a leader that has a first-move advantage, and can subsequently use an advantage it has –in it’s cost structure that would be discussed later on- to fix a certain amount of production that would, in the long run, simply oust any serious competitor, and leave little of market shares to the smaller followers.
Let us just have a look at two sets of the main consumption goods for a Moroccan household, Edible oil and Milk derivatives.

* Oil derivatives:

I’ve always wondered: how many firms are there in the Oil derivatives market in Morocco? Yes, we know Lesieur-Cristal, a notable subsidiary of the well-known SNI-ONA Holding, and according to their website (you’ve got to give them credit for that) they own the following products;

– in edible oil sub-sector : Huilor Graine d’Or Lesieur Plus Oméga 3 Lesieur FritureSafia Cristal Oméga 3 Cristal Friture Cristal Maïs Oléor

– in olive oil sub-sector : Jawhara Cristal Olive MabroukaSalamZitouna

That’s a lot of products, and anyhow, no competitor in the market is strong enough to field the same product portfolio, so it’s a lost cause for any challenger… (And, If I may, you sell oil if you want to, Lesieur’s not for leaving.. I know, my puns are terrible…) The Oil market is notorious for the fierce rows that sprung between the incumbent monopoly (i.e. Lesieur-Cristal) and any strong-hearted competitor trying to get in, most notoriously Savola; Unfortunately, our good friends the medias (the newspapers of course) consider it to be the very image of a healthy competition, or, in simple terms, a competition. Of course, I can understand that a journalist has a weak grasp of proper academic definitions (I mean, the Journalists’ school doesn’t graduate specialists) though I feel they are mixing market competition and Cournot-like competition. Let us for a moment assume their primary market is the consumers’ basket of goods (namely, 8.6% of the national average consumption as defined by the HCP) the Median told us that overall edible-oil market is roughly divided up between three main firms. It evolves around something like 80% of the Market for Lesieur, Savola & Huiles du Souss… I know, I couldn’t hold of proper data so I had to make some very extensible extrapolations). These companies have none but the price to attract the consumers. And seemingly the price range is wide enough (8 to 12 MAD/Lt) to create specific niches for each competitor;

However, these prices come to a cost, not really the marginal cost, but on the total –or sunk- costs: Lesieur-Cristal has a tremendous advantage, for their incumbent status allow them to keep fixed costs quite low; their balance sheet does show up a relatively low (their intangible fixed-asset ratio is around 71% for 2009 figures) and therefore, can afford to go further down their theoretical marginal cost. The Cournot model does assume the equilibrium price eventually settles at the lowest marginal cost. However, the main competitors are going in for a dumping, making the fixed cost –or, in Savola’s case, the entry cost- the ultimate efficiency criterion. Savola could cope with dumping, but certainly not for long, and I wouldn’t be surprised Savola would quit (which it did, eventually) All in all, Lesieur-Cristal is now in a near-monopoly situation, with a huge rent-situation, that is not invested –as we might hope- but rather spent in dividend-distribution policy. Because no substantial investment was made, they managed to increase the total distributed dividends to 187Million MAD, something like 44.68% over the year. Actually, they could have distributed twice the amount as they settled for an overall self-working capital of 300M MAD which can be virtually wholly distributed (save for the legal compulsory reserve), that’s a nice rent the Moroccan people are paying for… to give you an idea of what we might do with it, the 2009 Budget devoted a similar amount to the Wildlife & Forests departments (145 Million MAD investment allowance) or to the Families & Social affaires department (195 Million MAD) or even the jails and prisons office (264 Million MAD)

– Milk derivatives/eggs

Let us just focus on the Milk derivatives (it so happens egg-production is relatively out of line here) I can still remember the cooperative Jaouda struggling successfully against the other SNI/ONA-subsidy (come to thing of that, SNI/ONA are everywhere, quite disturbing !) How do we make up for this one? Is the market really ‘competitive’? First off, Jaouda (or shall we say, the Copag) is a cooperative, it works with a different economic paradigm (they do try to maximize their profit, but their cost structure has an additional term that changes that changes somewhat the classic optimization scheme, anyway, I think this article is quite interesting to read) the fact is, Copag is treating the local farmers with a win-win co-partnership, which allows for a steadier rate of profits, though at any rate Copag is posing a serious threat to Centrale Laitière.

Of course, they are taking away market share bits, but it does certainly not affect Centrale Laitière profits as we can draw up from their financial statements (2009): They managed to get 1Billion MAD in terms of cash result, which enabled them to distribute dividends for a total amount 461 Million MAD (2009). [Again, that could provide money for 5 regional departments for the Education ministry investment’ allowance] The idea of dismantling Central Laitière and selling it by bits to local cooperatives is, I believe the right move for a government to ensure a lower market price and a fairer distribution of wealth, instead of spending it all on dividends to the wealthy.I shall devote another piece on the oligopolistic structure of the Moroccan economy –or at least, for some of the essential goods- and the need for a genuine democratic government to crack down radically this intolerable rent-seeking economics. I would be quite interested to write something on the ‘grima’ system; it looks as though the whole economic structure moves in a bizarre and rather unhealthy paradigm, namely the permanent quest of comfortable and effortless rents, just like ‘grima’ seekers.

Basically, these firms that supposedly proud themselves to be leading the Moroccan growth are just following the same old scheme of rent-seeking, of course with much modern management techniques, but the fact of the matter remains what it is: Moroccan capitalism follows ‘grima’ scheme. It became so much of a norm that even the Cour des Comptes acknowledges the fact in many parts of their 2008 Report:

Il a été relevé que l’octroi de l’agrément ne repose pas sur des règles précises” or “En terme d’agréments octroyés, l’évolution du nombre des agréments octroyés permet de constater que […]1749 agréments ont été accordés en cinq ans, soit en moyenne 350 agréments par an. En dépit de l’amélioration constatée dans l’évolution annuelle du nombre des agréments d’une année à l’autre, il convient de souligner que les 4445 déclarations d’intention de création exprimées entre 2003 et 2007 se répartissent comme suit:

• 1829 déclarations seulement ont été suivies par des demandes d’autorisation, soit un taux de désistement inquiétant de près de 60% de la part des déclarants;

• 1749 agréments seulement ont été accordés, soit un taux d’agrément de 39%. Ce taux modeste trouve son explication, en partie, dans la lourdeur remarquable de la procédure […]

All in all, temporary nationalization is not the pristine and flawless strategy we might think of. It is only the governmental move to deal with private monopolies and oligopolies. The ‘grima-seeking’ mentality, on the other hand, cannot and will not be done away only by abolishing these rents: to abolish oligopolies means also to abolish the licenses-approval system as well.

2 Responses

Subscribe to comments with RSS.

  1. ayoub said, on May 6, 2010 at 14:54

    Nice post😉

  2. My 2010 in review « The Moorish Wanderer said, on January 4, 2011 at 23:44

    […] You chicken out if you want to, the radicals are not for selling out… April 2010 1 comment 3 […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: