Thursday, September 11, 2008

An Example of Perfectly Competitive Market Condition

A market condition where no buyer/seller has market power - ability enough to influence the price at which a product/service/experience is sold, is called a perfect competition. Such conditions are not very common as there is a tendency for cartelization and the market condition usually becomes a oligopoly. But, I think there is one market which is a superb example of a perfect competiton example - the festival offerings market near Dadar Station in Mumbai!

The Ganesh Festival is currently underway and everyday as I walk to office walking amidst the bustling market which sells everything from flowers and incense sticks to toys and sweets, I cant help but be amazed at the number of buyers and sellers who throng these markets. There are many 'firms' which are selling 'homogeneous'- identical products and innumerous buyers. Also, anyone who wants to sell flower garlands or homemade wicker baskets can find a spot on the road and set up shop - very low entry barrier; well, there is a threat that some goons or a police guy might object to you sitting in that particular spot - but finding another spot nearby will not be difficult. All these conditions indicate towards a perfectly competitive environment.

I did a small dipstick survey to test this hypothesis the other day. I went around asking prices for one yard of a flower garland. The market can be classifed into three distinct geographical locations- as the sellers who are close to the entry of the rail station, those who have set up shop under the flyover and those who are on the pavements on the roadside. The price was uniformly in the range of Rs.6 to Rs. 6.50 for one foot of the flower. This price was probably on the lower side as I asked the questions in the evening and the quality of flowers was not as good as in the morning. Those under the flyover whose product was safe from the rain and sun during the day asked for Rs.6.50, but the number of people buying from them was much lower (This could also be because the area under the flyover is limited and the crowds feel suffocated). The ones near the station entry had poor quality products - dried out flowers. Probably because of the sheer number of people who move in that area during the day and the heat. The ones on the roadside pavements had the bulk of the business and uniformly charged Rs.6 for one foot. I asked quite a few people on the road for the price and all of them concurred with this amount.

I tried demanding, for a foot of flower, to be sold at Rs.4 and found nobody willing to sell. Market information is also high among the producers (another classic condition of a perfectly competitve environment) and they know that no other in that market would sell to me at Rs.4 and they are willing to forgo my business not offer an attractive price (Although, the quantity I was consuming was very small, I doubt if they would have budged from the price had I mentioned even a bigger volume of purchase). On the other hand, although there was no way for me to test it, the information of price and quality was high among the buyers also. Most of the people buying were women who are streetsmart and have an 'andaz' (right estimate) of what needs to be paid for the product.

This is an interesting market to study economics in. The dynamics of the market are purely competitive. I wish I could have spent a longer time in the market to see how the price transition from Rs.10 per foot in the morning (estimate), when the flowers are fresh to Rs.6 in the evening happens and where amongst the three geographical sections of the market does this happen. Is this price an equilibrium price which comes after fluctuations or is it a straight drop in price. This could be an interesting school assignment on economics if someone is willing to spend sometime in all the grime and brave both the rains and sunshine!

1 comment:

lordofwords said...

Here is an analogy to your case study. The case of Mother Dairy Milk. I found out recently that the milk in Winter is cheaper as compared to the Summers becasue the crop fed to cattle is produced more then leading to more yield. Also in Summers in the morning the milk is cheap like Rs.9.50 (for 0.5 lt.) as compared to Rs. 10/11 in the evening when the vendors have to use refrigerators to store it cool.

Intersting isnt it?

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