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[ 18 minute read ]
This is a framework of a story I came up with which I used to explain three types of competition in economics. It begins with a family of weavers of fine wool carpets, who own their own sheep, in the 14th century Indus Valley, India. I had to learn about sheep to help me understand markets! Please help yourself to the ideas and the explanations.
The actual interaction between the characters, you will have to imagine for yourself.
Three types of competition: pure, imperfect, and monopoly.
If there were once four siblings who were all taught by their parents how to make fine carpets in the Indus valley, in 14th century India, the same way, to the same design, and with the same dyed wool from their own sheep, and sold these carpets in the market place in the village square alongside their father and mother at such a low price that no-one else could make a profit selling carpets in the village, that family would have a monopoly selling carpets in that village.
If, in the region in which their village lay, there were sixteen other carpet makers who were also sheep owners and wool spinners, and they produced carpets to designs that very closely resembled the designs of the two parents and their four offspring, and sold their carpets at a very close price to each other, and no-one else in the region could match their prices there would be perfect competition. Perfect or pure competition is when a firm producing near identical goods to its competitors, has some control over its prices. Since all these producers or families have vertically integrated businesses the barrier to entry into their market is high to carpet makers who own no sheep and cannot process wool. These new carpet markets wanting to enter the market would need to buy wool either locally or from further afield, and the original producers could sell their carpets at below the production costs, including the cost of wool, that new entrants to the market would necessarily have to pay. Most importantly here, is we must realise that no-one is getting rich in this regional community; they are only taking the opportunity to make sufficient money to feed the family members and care for their sheep (sustenance farming and production).
Two marriages and worrying times
If two daughters of one of the sixteen competitors married into our first described family there would be extra mouths to feed there, notwithstanding that a dowry would go along with the brides because they were considered to be a drain on resources in ancient civilisations, as in, take my hungry, weak and useless daughters away. This dowry could well be a bunch of sheep going along with each bride. What we have now is a larger flock of sheep owned by our first family AND two extra very capable shepherdesses with sticks, who are also wool carders, spinners, dyers, and weavers. Three outcomes can occur,
a) the quantity of extra sheep provides only sufficient revenue to continue to live hand-to-mouth for a household of, now eight people;
b) each of these newly married brothers go off with their brides and their new sheep and produce carpets to the same design elsewhere in the region; or
c) these two brothers and their wives go off, taking their sheep with them, and make carpets to a new design elsewhere in the region.
Solutions, but it won't be easy
a) despite there being a larger quantity of carpets available for sale by one whole larger family it only fills the gap left by the lessened production of the families from whence the brides came; and these families have less sheep to produce wool. There is no change to the market in terms of supply or demand, no riches made and no competitive edge is manifested. Nonetheless, this family of eight would have a larger share of the carpet market in their village.
b) the supply of carpets in the village is reduced as a result that our first family has lost key workers when the brothers depart, yet the quantity of raw material, being the original remaining sheep, stays the same (the same number as there were before the two brothers left, taking their hungry mouths with them – and their wives). Now, there is a surplus of sheep and not enough people to process their wool, or there is a surplus of wool and not enough people to process it into carpets. In any case, either the sheep are sold or the wool is sold. In the first case, there is an opportunity for a new entrant to the market to set up a virtually integrated business by purchasing sheep; or in the latter, a business buying wool to make carpets to a new and exciting design that competes in the same market square in the village as the plain and similar designs already sold there. Nothing has really changed by the entrance of a new design until the old carpet producers recognise that the demand for the new design is undermining the demand for their plain designs. At this time, some of the existing carpet makers may change their designs to represent their family history. This is product differentiation. Now, in the market square there are many different and exciting designs and the beginning of brand awareness and brand loyalty (initially through family connections with one or other family of carpets makers). This is monopolistic competition. Monopolistic because the designs represent individual families and their ancestors and no-one else will ever make the same designs; doing so would disparage their own family and ancestors. Yet there is still competition in the market sector.
c) the two brothers, their wives, with their dowry sheep, form a collective and farm the same area. They have to because they cannot care for the sheep, shear the sheep (actually primitive sheep had wool that could just be pulled off (by ‘rooing’), wash, card, spin, and weave the wool into carpets, and sell the carpets in their newly found village market square when they are existing only as two pairs of people. Such is the lack of labour, this band of carpet producers, recognising that a good design sells well in another market, weave carpets to a design that has vivid colours that deeply contrast, but due to time constraints and lack of labour settle on designs apropos to nothing; one that any carpet maker could easily copy or use as a design idea (deeply contrasting colours). When other carpet makers produce similar carpets to the brothers and their wives, there is perfect competition, where a large number of small firms supply an identical product. In this example, identical means vivid contrasting colours apropos to nothing in wool carpets.
Sibling Rivalry Aside
As yet, there is nothing to propel a producer into having an advantage; there are no real constraints in design, no recognised regulations, and no changes in efficiency or production costs.
However, when the two brother’s parents die, their two unmarried brothers who were living with their parents have, now surplus, sheep and wool that could be sold as carpets but would provide more than enough money for two mouths, if they could only process it and have the time to sell it. They could sell the sheep, sell the wool, or form a company with their married brothers and their wives to make only the new and exciting carpet designs, which sell really well but so far lack brand awareness and brand loyalty.
So far no change, you think, this is simply going back to six mouths to feed (four brothers and two wives instead of two parents and four brothers). Yet the dowry has swelled the flock in two distinct ways; by direct addition; and by husbandry.
Numbers in this example are kept to a value that is easily understood. Ten ewes and one ram will typically produce ten lambs per year, which can be sheared / (rooed) to keep them cool in hot weather. When the lambs are two thirds of their adult size/weight they can be tupped or mated. This could be when they are one year old to give birth when they are eighteen months old, but more likely on poor soil and with primitive sheep, tupped when they are two years old and birthing at two and a half. But let’s say there are lambs every year. (for ease of counting and multiplication)
Yet, by the addition of four more ewes as two dowries, two more female and two more male lambs could be born.
Without eating any, and with impressive shepherding and predator deterrents, and no other losses, the original flock of eleven in the year 1300, (ten ewes and one ram), with each ewe producing one lamb a year, could in six years time (1306 AD) be a flock of:
30 new ewes from the original ten ewes (and 30 male) Total 60 lambs were born
Born in 1301 AD and tupped in 1303 AD, five ewes being the first home generation would produce in 1304 – 1306 AD perhaps two or three female lambs in each year (total 7 of each sex over three years)
Born in 1305 AD to the first home generation two or three ewes in 1305 would be tupped and produce one or two lambs in 1306 AD
- making a total of 35 new ewes ready for tupping in 1306 AD and thirty nine male lambs that have been for the cooking pot over six years
plus the ten original ewes equals 45 ewes ready for tupping in 1306 AD
With four extra ewes (dowries) there is the immediate addition of four ?fleeces and then:
2 new female lambs from the dowry ewes (and 2 male) every year for six years (total of 12 lambs of each sex)
1 new female lamb born each year in 1303 AD to 1306 AD from the first dowry ewe’s offspring every year (total of 4 lambs of each sex over three years)
The flock size is now 69, including the original 11 and 4 dowry ewes. Unfortunately, a ram cannot service this many in a short period and it is preferable to have lambs born in safe seasonal weather so there needs to be three rams for this flock size (so a bit less to eat for the owners then) which makes the whole flock size 72 sheep, twenty one of these ewes are four dowry ewes and their seventeen descendants.
In reality, ewes about to give birth experience a reduction in immunity to internal parasites and die or give birth to stillborns. Increasing the size of a flock will not change the incidence of this type of death. However, increasing the size of a flock will reduce the percentage of losses to predators, yet, will require greater shepherding with big sticks. So, here, there is a human resource problem that could inhibit flock size. On top of that is the ground and area on which a flock feeds which may support a specific flock size but cannot also provide the extra nutrition that ewes need in the final month of gestation (Approximately 70 percent of fetal growth occurs during the last month of pregnancy). So, nutrition is a contributing factor in inhibiting flock size.
Time to say goodbye
The four brothers and the two wives cannot hope to increase their market share if they all live in the same village with the same pasture. So, their market share remains the same in their respective villages. However, we have a workforce of six young persons and a large area of grazing, separated into two, which was not available in the same quantity or quality as when there was two parents and four brothers. Furthermore, there are more sheep to breed from (dowry) and a larger quantity of lambs born per year on a wider pasture to the same number of people with hungry mouths; these mouths and stomachs are now better satiated by eating the respectively larger quantity of male lambs. Hence, there is a surplus of raw material (sheep as ewes) that will eventually be constrained by land and nutrition resources.
The 'Six'
We might look at this as the four brothers and two wives (‘The Six’) having a reduction of average costs; but since this is a vertically integrated business we are primarily considering the reduction in opportunity cost until we realise that already the six people are fully occupied in husbandry and wool processing, so there is no reduction of human interaction or no spare time. Or, we could consider an economy of scale; but there would now need to be employees to add to the already overwhelmed labour resource. Luckily for ‘The Six’, because no-one could enter the same perfect market as they and their competitors, there are available workers in both villages who could be paid to process wool, or the surplus wool can be sold off cheap to them to process for themselves. This is the stage at which sustenance farming changes into specialised jobs within an industry. The brothers may fight the sheep predators, grab handfuls of wool (rooing), and weave and sell carpets while the wives and workers process the wool and also weave carpets. As long as the production costs do not rise too significantly the rate at which ‘The Six’ can produce funky carpets will increase. This is an example of an economy of scale because the unit cost is reduced, but only in terms of opportunity cost. However, specialised focus on a single task brings about faster production and superior quality products as aptitude for a task is better utilised and experience grows more rapidly. However, there is an attendant cost of wages for extra workers in this example. Faster processing from developed skill-sets may cover the wage costs and result in higher carpet production rates, thereby reducing overall costs.
Where there is a competitive advantage, such as an economy of scale, a perfect market is destroyed and an imperfect market takes its place. An economy of scale that cannot be matched is a barrier to entry in the market.
In
addition to declining costs, other barriers leading to imperfect
competition are legal restrictions, (patents or government regulation), high entry costs, advertising, and product
differentiation.
In this whole example, towards the beginning, we have a loyal customer base buying traditionally crafted carpets from separate families who design and make carpets specific to their family ancestors, with each family making a different design. This means that the producers could set their own price as their carpet is somewhat more or less desirable to a buyer than a competitor’s as the buyer’s loyalty wins out. A new design with a strong contrast of colours entered the market as a free-to-purchase item with no guilt attached to the buyer. Then ‘The Six’ produced the funky carpets in high volume in two villages. Because the same funky designs are available in two villages advertising at no financial cost is established. A buyer can buy a carpet made by ‘The Six’ closer to their home and more people, as visitors, will see those carpets, especially when the carpets are taken out of the home to be beaten outside.
Of course, in 14th century India not many people travelled beyond the next village. However, in a city, just like the prevalence of sheep in remote areas, the more incidences of something the greater the multiplication of reproduction. So, more incidences of funky carpets creates a wider reproduction of wondrous perception and experience in passers-by or home visitors.
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