Tuesday 5 February 2013

News & Opinions: What Makes Beef Expensive?

Image from naij

Economics always fascinates me. Although I am not any good as a trader, I love to understand and learn more about the psychology behind all those changes in the world of money.

Take for example, The Standard reports the rise in price of China-imported beef per cattle. Some think that it is due to the Ng Fung Hong's monopoly, including the Hong Kong government, which might be true, because the lack of transparency in the price changes allows the company the absolute say about the price of beef.

Supposedly, adding competition to the monopoly will help the situation, since the pie remains the same size,  market shares of Ng Fung Hong should drop once competition enters the market and Ng Fung Hong will have to lower their prices to keep up with the competition. However, the assumption that the pie remains the same size is the big problem, because it will not.

People can tolerate but are not stupid. When the price of beef gets higher, people will buy less or switch to something else that is cheaper, the demand for beef will drop, making the pie smaller for all Ng Fung Hong and competitors.

Also, doing business is first about investment capital. Since Ng Fung Hong has the existing network that the two proposed competitors may not have, it is not going to be cheap to put up that challenge to the market leader. Who is willing to invest in a business that is shrinking?

Western Harbour Tunnel from 108th floor
Image from Locky's English Playground

If the market is shrinking, why is Ng Fung Hong still in the business? Well, having the absolute control over something means they enjoy the power of increasing and decreasing the price of beef. If the market shrinks, they can up the price, much like the Western Harbour Tunnel, less work, same gain, why not? But the time the market cannot take any more price increment, Ng Fung Hong can easily drop the price to release that explosive demand for long-missed taste of beef, thus continue to earn by the tonnes.

If adding competition to the market may not help, why does the government not taking back the control? Ideally speaking, the government could. With money and power, there will always be someone smart enough to do the job well, but Hong Kong isn't Singapore, Hong Kong isn't a country by itself and so it doesn't have the absolute power to run businesses without going through much objection. There are existing unions and companies that would protest about the lack of freedom of trade, something that Hong Kong is proud of possessing and dare not to harm, thus the usual taking-no-action-is-an-action strategy is preferred.

Everything works in cycles, each interlocked with another. They are like high energy unstable particles that are constantly in the search for equilibrium, but reaching such equilibrium takes a very long time, so governments tend to use their more visible hands and add interventions to speed things up. However, government policies are often more political than fiscal, which is why ideas are not always translated into actions.

monopoly -- (n)  [C or S(an organization or group which has) complete control of something, especially an area of business, so that others have no share
transparency -- (n) [U] the characteristic of being easy to see through
tolerate -- (vb)[T] to accept behaviour and beliefs which are different from your own, although you might not agree with or approve of them
shrink -- (vb) [I or T] to become smaller, or to make something smaller
explosive -- (adj) describes an increase which is very large and quick 
objection -- (n) [C] when someone expresses or feels opposition to or dislike of something or someone
taking-no-action-is-an-action -- (adj) from saying "taking no action is an action", meaning not doing anything is actually a way of doing something
equilibrium -- (n) [S or U] slightly formal a state of balance

Traders beef about new supply plan @ The Standard

Western Harbour Crossing tolls to go up @ SCMP