The Selling Of Fruit And Vegetables

The Research question that was investigated is What market structure characterizes the selling of fruits and vegetables in the Al Seeb Souq?

The investigation was undertaken by first collecting secondary research that was published by newspapers, internet blogs and government laws to determine information about the Souq.

Primary research was undertaken by interviewing four people, questionnaires that were handed to thirty random sample and observation was conducted to gain more information about the Souq and see if the primary research will back the secondary data obtained.

Most of the results obtained came with similar conclusions that the Souq resembles a monopolistic competition with features of a perfect competition market structure.

Therefore based on the data obtained, I came up with conclusion that the market structure that characterizes the selling of fruits and vegetables in the Al Seeb Souq would be a monopolistic competition market structure.

Word Count: 145

Introduction

The fruit and vegetable souq is located in the capital city of Oman, Muscat, has been operating for over 100 years. A Souq is a market where buyers and sellers come to together to carry an economic transition. The market is packed with consumers from different nationalities from different regions of the city. The market is known for its fresh fruits, and the wide variety in both fruits and vegetables. There are around 200 shops in the market selling almost homogenous products [1] .

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In IB Economics, we studied theory of the firm and how firms operate in everyday life, which was a clear link to the fruit and vegetable market. The shops are market structures, but the true market structure if these shops are unknown. The IB Economics course encourages students to think and link the relevant theories to real-life situations and what goes on the real world.

After visiting the market several times, I was astonished at the fact that the shops are able to sell homogenous products are able to survive and compete. Not only do they compete with each other, they are forced to compete against the opening of malls that also sells fruits and vegetables at a competitive price. The fact that many shops are able to survive in extremely competitive conditions selling similar products, is an interesting phenomenon, which encourages someone to wonder how why these firms are able to survive, and making it worthy of investigation.

The questions below encouraged me to come up with my research question “What market form characterizes the fruits and vegetable market in Muscat?”

How do these firms survive although selling almost homogenous products?

What competitive advantage do some shops have over others?

Is there some sort of collusion between shops?

In this essay, I will undergo an in-depth understanding of the characteristics of these shops, and how the firms are able to compete, the method of competing whether it is price competition or non-price competition, as well as the relationship to consumers, to answer my research question.

Hypothesis

My hypothesis is that because there are large numbers of firms, that are able to survive, the market will have some sort of collusion in order to maximize profit between these firms. Another alternative is that the shops may operate in monopolistic competition, meaning there products are differentiated therefore creating brand loyalty between consumers, therefore allowing the firms to survive.

Methodology

In order to effectively analyze the market structure of the fruits and vegetable market, both primary and secondary research will be conducted. Primary research will involve:

Observation by Observing the similarity and differences of the types of product to determine if there is product differentiation and observing the price of the product to determine if there is price rigidity. Observing will be 5 different shops because the market is too big. Interviews will be conducted with shop owners to determine the market mechanisms, conducting at least five interviews. Questionnaires will be handed as doing a survey asking consumers about what determines what they buy, or the knowledge they have about the market.

Due to the fact that the market is not very famous, there is very little secondary research about the market. But the secondary research will involve:

Newspapers and Their portrayal of the market and prices. Internet Blogs by the people who go the market and their ideas. Economic theory, Economic theory about how each market structure operates and relating the market to the economic theory. Country laws regarding competition whether the government laws allow collusion, because if collusion is allowed it might provide incentive for shops to collude.

Secondary Research – Economic theory

According to the economic theory, there are four apparent market structures. These are : Perfect competition, monopolistic competition, oligopoly and a monopoly.

Perfect Competition

The industry is made of a large number of firms

Each firm is relatively small compared to the size of the industry.

Firms are price takers, not price makers, they do not set prices but go with the prices of the market

There are no barriers to entry, firms are completely free to enter and leave the market

They sell homogenous goods, meaning they sell the exact same product. It is impossible to distinguish between goods

There is no brand loyalty because of the homogenous products.

All producers and consumers have perfect knowledge of the market. Consumers are fully aware of prices in the market, and each producer knows the cost of production for other firms.

Monopolistic Competition

The industry is made up of a fairly large number of firms

The firms are small, relative to the size of the industry.

The goods are slightly differentiated; therefore it is possible to distinguish goods.

There is little brand loyalty because of the differentiation factor.

Firms are completely free to enter and leave the industry

Oligopoly

Few firms dominate the industry.

There are not many numbers of firms.

A large proportion of the market share is shared between few firms.

There are significant barriers to entry.

There is strong brand loyalty

There are two types of oligopolies. Collusive and non-collusive. Collusive oligopolies is when firms collude to charge the same prices for the products they sell, in order to maximize profits for both industries. Non-collusive oligopolies are when firms do compete and there is no collusion that takes place.

Monopoly

There is only one firm in the industry and produces that specific product.

High barriers to entry.

Abnormal profits are able to be sustained the long run, abnormal profits are profits that is more than what is needed to stay in the industry.

Secondary Research- Published Information

To investigate competition law, an article published on the Oman Observer 15th of April 2012, stated that “The Board of Directors of the Public Authority for Consumer Protection has approved the Competition and Non-Monopoly Law and stressed the need to complete steps to issue the law. The new law seeks to establish a competitive environment, achieve a balanced market and combat negative phenomena leading to monopoly of products or control of their prices”. This law is still not implemented, the fact that in the past and currently that there is no competition or anti-monopoly laws creates perfect conditions of the firms in the souq to collude and charge higher prices.

According to the Oman tribune Newspaper, ” Al Seeb Souq is famous for the variety of vegetables, fruit and Omani dates on offer along with a myriad of local and foreign goods” suggests that the souq attracts its customers using a wide range of products, the variety suggests that there is competition between the shops suggesting highly unlikely to be a monopoly. It also states the souq ” meeting the desires and interests of various people” suggesting brand loyalty among consumers which are most apparent in oligopolistic and monopolistic competition.

An internet blog stated ” this includes local dates and halwa, which you can get for a tenth of the price of the supermarket” throughout the blog the blogger constantly emphasis is the low prices within the souq. The low prices suggests that there are competition within firms, hence, also, resulting it in highly unlikely being a monopoly and more of a competitive market structure. It also reveals that through low prices, the souq is able to compete against supermarkets.

The results obtained from secondly research came up with similar ideas, that there is highly unlikely evidence of monopolies. Although the competition law does not band monopolies, the low prices and the variety of goods information obtained from the newspapers and the internet blog suggests there is somewhat competition between these shops, to further investigate which market structure, primary research was conducted.

Primary Research – Questionnaires

A questionnaire was handed to a random sample from 30 people. The following questions and analysis are:

57% of the respondents stated that they visit the same shop, this suggests that there is strong brand loyalty. Which matches the statements obtained from the newspaper and the internet blog. Brand loyalty often is an oligopolistic or a monopolistic competition feature, hence, it seems unlikely that the souq is in perfect competition. If the souq was a monopoly, a larger number would have been obtained such as 80% and above would be suitable.

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Around 50% of the consumers suggested the price of goods in the souq was low. The low prices are not often a feature of oligopolistic and monopolies, because consumers would’ve ranked the prices as high. This suggests that in terms of pricing, the Souq resembles a rather monopolistic and perfect competition market structure.

Around 23% had excellent knowledge of the shops operations while 34% had very good knowledge suggesting that there seems to be a lot of knowledge about the shops operations. A stunning 0% showed that no one knew absolutely nothing the shops operations. The results indicate there seems to be good knowledge, but not perfect knowledge which heavily signifies monopolistic competition in terms of knowledge of consumers.

50% of the respondents revealed that they knew which exact shop to go to in order to get the same product for a cheaper value. While 30% knew occasionally, and 20% did not know where to get. The majority had knowledge of the market but not perfect, once again, a characteristic of monopolistic competition.

The majority went with price with a high 71%. Quality of goods also mattered with 20%. This indicates firms compete on price-competition. Competing on prices generally suggests the market structures that are the less dominant ones such as monopolistic and perfectly competitive market structures.

Throughout the entire questionnaire, results obtained were consistent with all of the questions having a common market structure: Monopolistic competition. The blend of brand loyalty, price competition and having knowledge but not perfect indicate this there were no dominant markets such as Monopolies and Oligopolies as the results would have differed. Strong evidence continue to suggest monopolistic competition.

Primary Research – Observation

An observation was conducted to see the prices of goods in the Souq, the presence of certain goods in the Souq, and the number of shops.

The number of shops is 86, this is quite large, which is a characteristic of monopolistic and perfect competition.

Each shop was small relative to the size of the industry, and each shop had the similar amount of area covering the Souq. This resembles a perfectly competitive market.

As prices are important signal in determine market structure, so a sample of five shops within the Souq. Five prices of goods of the exact brand were compared:

Price / Riyal

The prices seem to almost the same in all shops which suggests that they are competing on price. The fact that the prices are almost exactly the same is a perfectly competitive market structure phenomena.

All shops in perfect competition will be selling their goods at the exact same price because they are “Price Takers” meaning the take the market price and do not set their own price. A perfect competition industry supply curve looks like this [2] 

Since perfectly competitive market structures are price takers, their supply at a price determined by the industry. The supply curve is said to be perfectly inelastic, which means any change in quantity supplied does not affect the price at which it supplied at. The reason why prices of goods are the same in perfect competition, is that if a shop decides to lower a price, other shop owners will do the same thing, because there is perfect knowledge. If a shop owner decides to increase the price, it will immediately be out of business as the other goods will be cheaper. This phenomenon explains the small variations in prices, the shops would have probably went and followed other shops.

However, not all shops had the exact same products throughout, some shops had certain products which other shops didn’t, resulting in product differentiation.

The table reveals that some products are sold in certain shops and not all of the products have the exact same product. This means there is product differentiation which could be the reason behind the brand loyalty from the consumers. Product differentiation is mainly a feature seen in oligopolistic and monopolistic market structures. However when observing, no shop or certain shops seem to be dominating the Souq, and consumers and each shop had similar number of customers in each shop, suggesting the product differentiation leads is what distinguishes the Souq from being a perfectly competitive market.

The results obtained from observation tend to resemble perfect competition since there were the number of shops were big, and their sizes was small, but the product differentiation shifted to become a monopolistic competition market.

Primary Research – Interviews

Overall, four interviews were conducted. two interviews were with the shop owners, one interview with a regular customer for over ten years, and one interview with a lawyer.

Both interview of shop owners showed similar responses, suggesting it was reliable. When asked are customers regular. They both revealed that the majority of the customers are returning customers, matching the data obtained from the questionnaires and the secondary research. Brand loyalty has been consistently, a major factor in determination of profits in the souq.

Both shop owners admit they mainly compete on brand loyalty and by product differentiation. Mr Ahmed said “By selling certain goods that only our shop has, we thereby attract more customers”. Product differentiation is once again, apparent in monopolistic and oligopolistic market structures.

Both shops said that their profits cover their cost, suggesting they make abnormal profits. Abnormal profits is any profit it made by a firm over and above the normal profit to stay in the business [3] . One of the shop owners responded “Our profits are unreliable, we might be making profit for a short while, then if another competitor lowers prices or more competition enters the market we lose our profits”. This suggest that abnormal profits can be made in the short run, but are difficult to obtain the long run. This is a model of monopolistic competition and perfect competition. In the short run, monopolistic competition equilibrium is shown:http://upload.wikimedia.org/wikipedia/commons/b/b5/Short-run_equilibrium_of_the_firm_under_monopolistic_competition.JPG

The MC curve is the marginal cost curve, the extra costs involved in producing another product. While the AC is the average cost curve, which is the average cost of producing a product. The AR is the average revenue, the average money received from selling each unit of good. While the MR revenue is the revenue gained after selling each extra unit. Profit maximization occurs MR=MC. At the short run, at profit maximization output, the average revenue exceeds the average cost of producing the product, this results in the grey shaded area, which is the abnormal profits gained. However, the reason why this profit cannot be sustained as described by the shop owner “More competition enters the market”. The increase in competition is because firms are attracted by the profits that other firms are making, this causes more firms to enter the market and this creates a problem. When more firms enter the market, supply increases the following effect occurs:

The increase in supply will cause a decrease in price pushing the equilibrium at a lower price and a higher quantity. Therefore in the long run the equilibrium becomes:

More shops will enter the market until the average revenue equates to the average cost, this is called normal profit. Normal profit is the minimum amount of revenue that a firm must receive so that it keeps the business running, also defined as the part that covers economic costs. Therefore in monopolistic competition it is possible to achieve abnormal profits in the short run, but in the long-run it cannot be sustained which matches the statement made the shop owner. Monopolistic competition and perfect competition are the only market structures which can only make profits in the short run and only economic profit in the long run. In Both monopolies and oligopolies, both in the short run and long run abnormal profits can be sustained.

When asked about relationship with other shop owners, Mr Said responded” We are really good friends, we laugh together, we joke together, we even eat together!”. This matches the observation made that was apparent that many shop owners went to shops owners shops and were having a conversation. The close relationship between the shop owners could be a result of an oligopoly, and the discussions apparent may to be strategies to dominate the industry. Since competition law does not forbid oligopolies and colluding shops, the condition’s allow this to happen.

To investigate barriers to entry, I asked the shop owners that if a new shop enters the market, how will the shop cope? Both responded that it is not difficult for any new shops to enter the market, and the government encourages new shops to open to increase competition. This indicates they are no significant barriers to entry and firms are relatively free to enter or leave the market, a feature common to monopolistic and perfect competition market structures.

When asked if consumers know where the shops obtain their products from and the costs of getting the products, the shop owners said that most consumers have pretty good idea, but more of the old customers and frequent know exactly what happen. This suggests there is knowledge but not perfect knowledge which matches the results obtained from the questionnaire. In perfect competition, consumers have perfect knowledge while in oligopolistic and monopolistic structures, consumers have no knowledge. So the fact that customers have some knowledge signifies more of an monopolistic competition market structure.

Shop owners stated that they do not set the price themselves, they go on the market price and what other shops price their products on. This suggests they are price-takers, meaning they take the price set by the market. This is feature of monopolistic and perfectly competitive markets.

The interview with both shop owners were very helpful in identifying important aspects of the Souq, what can be summarized is that most of the evidence obtained from both the interviews is that the Souq closely remembers monopolistic competition with a possibility of a collusion.

Although the questionnaire was helpful in analyzing the Souq mechanism of operations, a short interview was needed for a customer why shops his fruits and vegetables from the souq for over ten years to obtain more detail and see how the market changed over ten years.

Mr. Said, a long-customer for the Souq, said that if there was an oligopoly it would be obvious and he would have noticed it. But being a frequent customer, he says that most of the shops are competitive and sell similar products. He also states that a lot of customers know the shop owners, and are frequent customers. He said the market has changed over ten years by having more products, more shops and more customers and has improved significantly. The interview with Mr. Said, once again, supports all the evidence obtained from the interview with other shop owners and questionnaires, that consumers have perfect knowledge and brand loyalty is an important factor in selling goods.

Mr. Mundhir, an experienced commercial lawyer in Oman was also shortly interviewed to determine competition laws. He revealed that there was no competition law correctly regarding oligopolies and monopolies. But also mentioned that a souq, is highly unlikely to collude due to the number of firms in the market. The lack of competition law, could maybe provide freeway for shops to collude, although this is unlikely.

Overall, the four interviews was very essential and perhaps the most useful method of primary research in terms of getting the information, the interviews mostly alluded to monopolistic competition, although there is no anti-monopoly laws, it seems very unlikely that these shops have colluded.

Conclusion

The entire research both primary and secondary came up with very similar results, which is that the market structure that characterizes the selling of fruits of vegetables is monopolistic competition. The fact that consumers had knowledge but not perfect, the presence of brand loyalty, profits cannot be sustained in the long run and many other factors constantly referred to the conclusion that the Souq was operating on monopolistic competition grounds with few features of perfect competition market structure, since there were a lot of number of firms and pricing was almost the same on all products.

Although there was no laws regarding collusions which means collusion and oligopolies are allowed and the shop owners had a friendly relationship with other shop owners, this does not necessarily mean that shops will collude, since no significant piece evidence from research suggested this, and the small nature of the firms makes it difficult to collude especially when selling extremely similar products.

However an unresolved issue is that how do firms change their prices in response to other firms prices, since data was gathered on a single day, and prices varied slightly between certain goods. What would happen after a day? Would be an unresolved question. Would the shop owners lower their prices after knowing another shop owner did? This would be a feature of perfect competition.

Based on the consistent results obtained from the questionnaires, interviews, and observation I have come up with the conclusion that monopolistic competition is the market structure that characterizes the Fruits and Vegetables Souq in Al Seeb.

Limitations

Although data obtained was reliable since most of the results came up with similar conclusions, there were limitations and improvements which could have been made in the investigation.

Although there were a range of people who were interviewed, only two shop owners were interviewed which is not enough to determine the market mechanism. More shops owners need to be interviewed.

The thirty people who took the survey were random. It would have been better if specified number of people from different nationalities and background took the questionnaire, to see how people from other backgrounds respond.

It would have been better If I have checked the prices the following days to see if firms will reduce their prices to other shops, and to see if prices change on a daily basis.

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