With an intention to give a third eye perspective, here we look at the recent limited supply, rice price hike, and the mishandling of the government intervention in the market, we look at what went wrong.
The rice market in Sri Lanka is an oligopoly, which characterised as a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market.
Sequence of actions
• When the rice prices continued to increase in the market, government started to have discussions with the main players or suppliers and the message was that to increase supply at controlled prices.
• The supply was not up to the demand and the prices continued to increase.
• Apart from inconsistent change to the control price, government also adopted a monitoring process using officials of the consumer protection authority.
• Despite failures of all measures, the government continued to have discussions with the major suppliers.
• Once these efforts were not successful, Government announced the decisions to allow imports and limit the amount of import to 70,000 Metric tonnes.
Let us discuss what went wrong in this process. As we are already aware, the rice market is an oligopoly, The government must know the key characteristics of an oligopoly and how it operates.
Although oligopolies have a number of other characteristics, we can observe the below key characteristics within the rice market in Sri Lanka.
Barriers to entry
Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market. These hurdles are called barriers to entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist.
Natural entry barriers include:
Economies of large-scale production.
If a market has significant economies of scale that have already been exploited by the incumbents, new entrants are deterred. Activities such as large scale purchase of paddy and large scale production capacities.
Ownership or control of a key scarce resource
Owning scarce resources that other firms would like to use creates a considerable barrier to entry. Long term fixed asset investments and island wide store facilities which enable easier distribution.
High set-up costs
High set-up costs deter initial market entry, because they increase break-even output, and delay the possibility of making profits. Many of these costs are sunk costs, which are costs that cannot be recovered when a firm leaves a marketsuch as its fixed costs. This high costs restricts new entrants to the market.
Artificial barriers especially attributable to Sri Lanka’s market include:
Superior knowledge
An incumbent, over time, have built up a superior level of knowledge of the market, its customers, and its production costs. The superior knowledge of an incumbent can give it considerable competitive advantage over a potential entrant.
Collusive oligopoly
Another key feature of oligopolistic rice market in Sri Lankais that firms attempt to collude, rather than compete. If colluding, participants act like a monopoly and can enjoy the benefits of higher profits over the long term.
Tacit collusions
Tacit collusion (also called ‘rule-based’ collusion) arises when firms act together, called ‘acting in concert’ but where there is no formal or even informal agreement. For example, it may be accepted that a particular firm is the price leader in an industry, and other firms simply follow the lead of this firm. All firms may ‘understand’ this, but no agreement or record exists to prove it. In many cases, tacit collusion is difficult or impossible to prove but that kind of collusion exists within this market.
What went wrong for the Government?
In trying to control the prices, as we explained earlier, government moved to a discussion with the market suppliers with an intention to increase supply. This was a first failure of the government. Government must act independently if they intend to regulate the market supply and price. The supplier’s objective and the government objective are riding in opposite direction and the attempt was never going to bring any result. In this process of continued discussions, the suppliers were able to increase the control price too.
In this effort government failed to increase the market supply as well as keep the control price at previous level.
The government announced that the imports will be allowed but also with a maximum limit of 70,000 metric tonnes. Another ill-informed approach. Dealing with an oligopoly, supply is limited, and the control price is agreed and allowing imports to a maximum limit, the market players have been handed with plenty of freedom and information to develop their strategy. The suppliers now have all the information. They know once this limited amount arrives in the market, in how much time (days) it will take to consume. They can easily plan their own output levels to keep the market at bay. That’s why we can see the erratic supply patterns continue to exist in the market.
Government again failed to increase the supply
The government also imposes a tax on the imported rice, even though the government explains that this is to protect the farmer, at a time when there is no harvest, there is no impact on the farmers. The objective of this tax is to have a gain on the government coffers, reduce the margin of the importers and to keep up the imported rice to the control price. This tax again gave the advantage to the existing players than the consumer. The current issue is not around harvest and protecting the farmer, the issue is providing the consumer with enough supplies at a reduced price. Government failed again in using the tax as a tool.
A proper successful regulation strategy would have been the following.
– As soon as the market experienced a shortfall of rice, government should have taken steps to import before any discussion with the existing players.
– No information on the limit or the amount of imports been made public allowing the existing players to formulate their strategies.
– New importers should be registered or imports by government agencies (Sathosa) only.
– Lower tax or no tax on rice imports at the beginning to allow enough supply to negate the shortfall and price competition. Imported rice should be sold at much lower prices to fight the supply shortfall.
In a longer-term view, the government can take following steps to regulate and make this oligopolistic market into more competitive market.
Government can remove barriers of entry to join a market. This could be by changing the rules required to join the market or by decreasing the number of regulatory rules and allowing more easy funding to establish rice mills. If entrepreneurs can move from another market into one which is dominated by oligopolists it will result in the control of oligopolist’s activities too. For example, provide tax relief for bigger players in the other sectors to enter the rice market to make the market will be more contestable.
Another method of government intervention could be by introducing a Regulator. A regulator works with firms monitoring the price and quality standards of a good or service. The regulator then ensures the firms follow a set of targets set out by the regulator and their team. Introducing more rules to operate in the sector, such as introducing compulsory limited company registration, more reporting requirements etc.
Disclaimer: The views and opinions expressed in this column are those of the author and do not necessarily reflect the official policy or position of MDWLive!. Responsibility for the information and views expressed lies solely with the author. MDWLive! is not responsible for any errors or omissions or for any outcomes related to the use of this information.
MDW Live! News Network 
With an intention to give a third eye perspective, here we look at the recent limited supply, rice price hike, and the mishandling of the government intervention in the market, we look at what went wrong.
The rice market in Sri Lanka is an oligopoly, which characterised as a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market.
Sequence of actions
• When the rice prices continued to increase in the market, government started to have discussions with the main players or suppliers and the message was that to increase supply at controlled prices.
• The supply was not up to the demand and the prices continued to increase.
• Apart from inconsistent change to the control price, government also adopted a monitoring process using officials of the consumer protection authority.
• Despite failures of all measures, the government continued to have discussions with the major suppliers.
• Once these efforts were not successful, Government announced the decisions to allow imports and limit the amount of import to 70,000 Metric tonnes.
Let us discuss what went wrong in this process. As we are already aware, the rice market is an oligopoly, The government must know the key characteristics of an oligopoly and how it operates.
Although oligopolies have a number of other characteristics, we can observe the below key characteristics within the rice market in Sri Lanka.
Barriers to entry
Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market. These hurdles are called barriers to entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist.
Natural entry barriers include:
Economies of large-scale production.
If a market has significant economies of scale that have already been exploited by the incumbents, new entrants are deterred. Activities such as large scale purchase of paddy and large scale production capacities.
Ownership or control of a key scarce resource
Owning scarce resources that other firms would like to use creates a considerable barrier to entry. Long term fixed asset investments and island wide store facilities which enable easier distribution.
High set-up costs
High set-up costs deter initial market entry, because they increase break-even output, and delay the possibility of making profits. Many of these costs are sunk costs, which are costs that cannot be recovered when a firm leaves a marketsuch as its fixed costs. This high costs restricts new entrants to the market.
Artificial barriers especially attributable to Sri Lanka’s market include:
Superior knowledge
An incumbent, over time, have built up a superior level of knowledge of the market, its customers, and its production costs. The superior knowledge of an incumbent can give it considerable competitive advantage over a potential entrant.
Collusive oligopoly
Another key feature of oligopolistic rice market in Sri Lankais that firms attempt to collude, rather than compete. If colluding, participants act like a monopoly and can enjoy the benefits of higher profits over the long term.
Tacit collusions
Tacit collusion (also called ‘rule-based’ collusion) arises when firms act together, called ‘acting in concert’ but where there is no formal or even informal agreement. For example, it may be accepted that a particular firm is the price leader in an industry, and other firms simply follow the lead of this firm. All firms may ‘understand’ this, but no agreement or record exists to prove it. In many cases, tacit collusion is difficult or impossible to prove but that kind of collusion exists within this market.
What went wrong for the Government?
In trying to control the prices, as we explained earlier, government moved to a discussion with the market suppliers with an intention to increase supply. This was a first failure of the government. Government must act independently if they intend to regulate the market supply and price. The supplier’s objective and the government objective are riding in opposite direction and the attempt was never going to bring any result. In this process of continued discussions, the suppliers were able to increase the control price too.
In this effort government failed to increase the market supply as well as keep the control price at previous level.
The government announced that the imports will be allowed but also with a maximum limit of 70,000 metric tonnes. Another ill-informed approach. Dealing with an oligopoly, supply is limited, and the control price is agreed and allowing imports to a maximum limit, the market players have been handed with plenty of freedom and information to develop their strategy. The suppliers now have all the information. They know once this limited amount arrives in the market, in how much time (days) it will take to consume. They can easily plan their own output levels to keep the market at bay. That’s why we can see the erratic supply patterns continue to exist in the market.
Government again failed to increase the supply
The government also imposes a tax on the imported rice, even though the government explains that this is to protect the farmer, at a time when there is no harvest, there is no impact on the farmers. The objective of this tax is to have a gain on the government coffers, reduce the margin of the importers and to keep up the imported rice to the control price. This tax again gave the advantage to the existing players than the consumer. The current issue is not around harvest and protecting the farmer, the issue is providing the consumer with enough supplies at a reduced price. Government failed again in using the tax as a tool.
A proper successful regulation strategy would have been the following.
– As soon as the market experienced a shortfall of rice, government should have taken steps to import before any discussion with the existing players.
– No information on the limit or the amount of imports been made public allowing the existing players to formulate their strategies.
– New importers should be registered or imports by government agencies (Sathosa) only.
– Lower tax or no tax on rice imports at the beginning to allow enough supply to negate the shortfall and price competition. Imported rice should be sold at much lower prices to fight the supply shortfall.
In a longer-term view, the government can take following steps to regulate and make this oligopolistic market into more competitive market.
Government can remove barriers of entry to join a market. This could be by changing the rules required to join the market or by decreasing the number of regulatory rules and allowing more easy funding to establish rice mills. If entrepreneurs can move from another market into one which is dominated by oligopolists it will result in the control of oligopolist’s activities too. For example, provide tax relief for bigger players in the other sectors to enter the rice market to make the market will be more contestable.
Another method of government intervention could be by introducing a Regulator. A regulator works with firms monitoring the price and quality standards of a good or service. The regulator then ensures the firms follow a set of targets set out by the regulator and their team. Introducing more rules to operate in the sector, such as introducing compulsory limited company registration, more reporting requirements etc.
Disclaimer: The views and opinions expressed in this column are those of the author and do not necessarily reflect the official policy or position of MDWLive!. Responsibility for the information and views expressed lies solely with the author. MDWLive! is not responsible for any errors or omissions or for any outcomes related to the use of this information.
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