The following day, he went on to tell us the features of each of the three. A monopolist has total market power and plays in a market with entry barriers. A monopoly makes 'abnormal profit' based on the ability to restrict output and therefore charge high prices.
In a perfectly competitive market there is free entry and exit, and market players make 'normal profit' as the market dynamics enable prices to adjust to a common level.
As I came to learn later (as I grew to become a professional economist), monopoly and perfect competition are two extremes - what we later used to call "corner solutions". The real world is somewhere in between, and that is the oligopolistic structure. [there is also monopolistic competition; I didn't learn this from Steve]. In an oligopolistic set up, there are either few players or a few dominant players.
If one wants to move the market towards perfect competition, one needs to look at one variable: number of players - not simplistically increasing such number but ensuring that that market dominance is not by few players (in other words expand the top).
Even this will not lead to perfect competition; it can only approach but not attain perfect competition status (we used to romantically refer to this as an "asymptotic process"). You cannot move an oligopolistic market towards perfect competing through attempting to fix the price. That is because, the reason you have oligopoly is "structural".
Now, the Institute of Certified Public Accountants of Kenya (ICPAK) leadership has chosen to argue that price controls will address a structural issue. They argue that the banking industry is oligopolistic, therefore cap interest rates will just do the magic.
This brings three things to mind.
- One, things that are expected to be obvious to some a group of professionals who are expected to be thoughtful and knowledgeable aren't usually so.
- Two, playing to the gallery is very very tempting. I can't see the motivation though when it comes to ICPAK leaders on this issue. Is it politics? Well, I don't know. What I know though is that it is not economics!
- Three, there is a huge difference between simple solutions (carefully thought through but easy to implement) and simplistic (looking at which side of the debate is noisy and assuming that they have a point). ICPAK leaders present a typical simplistic solution. Not that there is a simple one when it comes to interest rates; but one expects logic in any conclusion and I see none of that in ICPAK's assertions.
