Wednesday, December 1, 2021

Microeconomic analysis of BUA vs Dangote price war, by Muhammad Sagir Bauchi

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Around October 1929, values of stocks in the New York Stock Exchange (NSE) market dropped to an unprecedented record level. Within three days, many investors lost about $5billion. Towards the end of the year, major banks and investment companies lost about $11billion. That loss, led to closing of factories and laying off their workers, as economists forecast more hard times ahead.

But in places like Iowa and Midwestern states, economic hard times were already in place 10 years earlier. During the world war, the central US government guaranteed farmers of high prices for their crops and livestock. Farmers took advantage of that and increased their agricultural output, and also, 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 advices and plans. As such, they were of the idea that the economy would move back to equilibrium position even without governments intervention by what they term as “INVISIBLE HANDS” — FORCES OF DEMAND AND SUPPLY.

John Maynard Keynes was a radical economist that did not subscribe to that economic idea of the classical economists. He was the person that guided the then U.S govt out of that great economic depression. In his response to the idea of self adjustment of the economy in the long run, he opined that “in the Long run, we’re all dead” as such, he wanted the authorities to do away with ideas of the free market economy advocates, and intervene to stabilize prices and supplies from disequilibrium and correct the economic abnormalities. Fortunately, the authorities heeded his ideas and acted accordingly. With his advices, they successfully overcome.

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 above margin, which in itself is abnormal situations. 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 favour 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 Science is divided into two categories. They are: Microeconomic and Macroeconomic.

Microeconomic studies individual households, and business decisions. It also focused on demand and supply, and other variables that determine price levels.

In a nutshell, microeconomics tries to analyze 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 bottomline approach to determine the course and nature of an economic phenomenon.

Recently, a competitive war broke out between the two dominant producers of the Nigeria sugar industry: Dangote & BUA. In microeconomics, the war is known as “Price War”. It is a situation where two rival firms reduce the price of their commodity in order to increase their revenue and market share. Normally, they did that for a short run. Whenever the war is intense, the rival firm usually reacts by setting a price lower than the price set by the other rival firm. They’ll keep on with that until they reach a point known as ‘PERFECT COMPETITIVE PRICE’, where none could either reduce or increase his price. And if any increases price, the company will lose customers to its rival. And if it reduces his price, it will surely incur loss.

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

But, was the action of BUA emanated 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.

Adam Smith, who is known as the father of modern capitalism, lived all his life on a philosophy known as “SELF LOVE”. With this, he meant that man is naturally selfish. He loves himself more than anyone else. In his quest to better himself, he can extend to benefit others. But his intention was to better himself not them. And in the course of that, he’ll count his gain from the people he bettered.

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For instance, when a private school is established, the school contributes in three ways; providing employment, imparting knowledge to the pupils, and above all, serving as a means of income generation to the proprietor. So, here, the proprietor brought what will better his society, but his intention is to MAXIMIZE HIS PROFIT. That is why the school fees usually vary from time to time.

This is a typical example of our modern CAPITALIST. They can go extra mile to better themselves at the expense of the poor masses. And they usually hide in the veil of WELFARISM, while in reality, maximization of their profit is what matter to them, not the welfare of the society.

Adam Smith, in his Capitalist Bible, “The wealth of a nation” gave a best description of the capitalist, where he said, “It is not from the benevolence (kindness) of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. So, with the action of BUA, he will reap at least three things; increase his revenue and market share, attract the customers of his rival and gain a big place in the heart of his customers.

In every game, there are two players. One may be smarter or wiser than the other. In this saga, BUA is smarter than his rival. For his single statement made to his dealers is capable of destroying his rival in the industry. His statement, “HIKE PRICE AND LOSE YOUR LICENSE” portrayed his rival as a WICKED being. While in reality, he was only employing market politics to do away with his rival in either way.

But if we are little bit away from looking at the action of BUA from a face value, we can agree that he did the right thing by choosing to go for a small profit and increase his sales, and also put smile on the faces of his final consumers. And he’s smarter than his rival.

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Dangote Group, in their quest to retaliate the action of their rival, filed a petition to the Minister of Industry, where they accused their rival of operating in impunity, acting contrary to laws laid by the National Sugar Policy by selling their products locally instead of otherwise. As such, they want them to closed the firms of their rival!

This is purely a case of dominance. And it is in nature of human being that they don’t want to be in competition in whatever they do. But, to be frank, Dangote exhibits what could be simply regarded as “selfishness” in this his reaction. Instead of seeking government assistance to defeat his rival, he should’ve reacted with pity and a sense of sacrificing some of his profits to retain his customers, thereby reducing his price lower than the price set by his rival! As such, his customers would be retained, and he would have surely boxed out his rival out of the market. But calling for government to shut down his rival’s industry will do more harm than good to his market in the eyes of their customers. This is because people always chose to reside with those they believe to be oppressed.

In this saga, people view BUA as a hero and Dangote as a villain. So, if he truly wants to retain his hard-earned reputation as business-philanthropist magnet in order not to lose his customers, he must act wisely. For a mistake at this stage will surely haunt him 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 it’s national development, which is correcting inflation, generating employment and stabilizing the market/economy, thereby creating an enabling environment for other investors in the sector and to facilitate more competition in the industry.

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

Muhammad Sagir Bauchi is a student of Economics in Bauchi State University, Gadau. He writes from Bauchi, and can be reached via [email protected] or 07019718681.

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