Oligopolies in Central European Emerging Market Economies Miroslav Manas, University of Economics, Prague What Emerges in Central Europe? Exact definitions are not a strong point of the economic science. A generally accepted statement that in Central Europe have arisen new market economies should theoretically mean that the allocation of resources formerly controlled by government is now exercised by market forces. But the necessity to privitize practically all production capacities, majority of natural resources and most of services in five or six years gave to the government such a power to regulate allocation of resources that one could hardly find an analogy to it in the whole modern history of that territory. Now, when the transformation period is almost at the end, we may investigate what sort of market structure really emerged from this centrally controlled privatization process. Competition, monopoly or oligopoly Perfect competition, monopoly and oligopoly are the three theoretical simplifications of the relationship between producers and consumers. For the majority of real markets in the industrialized countries the most appropriate models are those based on the concept of oligopoly. A weakness of the oligopolistic market (at least from the point of view of consumer welfare) is the possibility that a collusion may easily cause an originally competitive oligopolistic market to degenerate into a monopolistic market, where cooperating oligopolists enjoy monopoly profits and consumers may wonder what happened to the "invisible hand" of the market. The classic defense against oligopolist collusion is antitrust legislation. Antitrust measures, regardless of whether they are initiated by government, interest groups or individuals, should only be used in cases where the collusion is really damaging to consumers. Otherwise, these policies may be nothing but an attack on the most talented entrepreneurs who were able to develop production on the scale required for global competitiveness. A second economic tool for preserving a competitive market, particularly in small and medium-sized economies, is the free access of foreign producers to the domestic market. However, a problem with this instrument is the fact that foreign producers also often employ unfair forms of competition, resulting in collusive behavior and unfair competition. In Central Europe foreign firms sometimes suppress competitive domestic producers and install a collusive pseudo-competition. There exists yet another economic tool for discouraging oligopolists from collusive behavior. This tool consists in keeping inferior production capacities in reserve by subsidizing them from the state budget (that is, from the taxpayers). Under certain conditions, these subsidies represent a worthwhile investment by the taxpayers, as the results are greater savings in amounts paid by these same taxpayers for commodities purchased at competitive rather than collusive prices. This "blocking effect" is magnified by the fact that costs of modern large-scale technologies are sensitive to discontinuities in sales volume, while the costs of inferior production facilities tend to be equally inefficient regardless of the level of production. The principal characteristics of an oligopoly model are its strategic variables that are used by oligopolists to maximize their profits and follow some other secondary goals. A typical strategic variables are prices and quantities of output to be supplied to the market during a given period of time. Oligopolies can be characterized as either "noncollusive" or "collusive" oligopolies according to the potential interactions among the oligopolists. In a noncollusive oligopoly, the oligopolists are not able to communicate among themselves and they behave as competitors. The collusive oligopoly admits open or tacit agreements among oligopolists relating to the values of strategic variables and also to redistribution of profits as compensation for respecting a concluded agreement. By using Czech Republic and some principal commodities as an example, we shall try to analyze the typical market patterns functioning at present in Central European emerging market economies. Emerging Central European Market Economies In small sized Central European Economies, like there are Czech, Slovak or Hungarian economies, the perfect competition in the field of technologically nontrivial commodities is hardly more than a theoretical concept. These economies, until recently centrally planned and therefore mostly with monopolistic market structure, can install competition mainly by opening the economy to imports, and partly, by selling the domestic production capacities to foreign firms. Even if there exists a certain antitrust legislation, it is not easily applicable owing to the poor performance of the legal system. Almost all experienced lawyers work for private and preferably foreign firms. The antitrust measures, supervised by badly paid staff of ministry for economic competition have hardly a chance to be taken seriously. In what follows we present examples of what really remains from the idea of a competitive market. Cars - standard class. The main domestic producer of cars, Skoda, was sold by government directly to Volkswagen. The firm produces a very well selling car model, (there is 2 or 3 month waiting time for a Skoda-Felicia) and increased production significantly during the last 3 years. Disregarding that it uses a cheap domestic labor, the firm never in this period declared a positive profit. On the domestic market the prices of Skoda cars are relatively high. While in the period 1990 - 1995 the average wage increased 2.6 times, the price of the basic Skoda model increased 2.5 times. This is made possible by a relatively high demand for cars in Czech Republic and by high import duty on Japanese and Korean cars fixed so to demonstrate solidarity with the economic policies of the European Union. By keeping the prices high and exporting a considerable part of the production, Volkswagen is evidently a leading oligopolist. This policy keeps the market open to imports of German made Volkswagen models and also to Seat models from Spain, where Seat is another member of the Volkswagen group. The competitive factor is represented by imports of some Ford, Opel and Renault models which are sold for mildly dumped prices. The car market in Czech Republic may be characterized as a collusive oligopoly with Volkswagen group as a leading coalition, with state interventions protecting the market against Japanese and Korean competition. Beer. Czech Republic produces yearly 18.1 million hectoliters of beer, 1.4 million of which was exported (data from 1994). There is about 70 breweries in Czech Republic, 50 % of beer is produced by 10 largest producers. In yearly beer consumption per head, Czech Republic keeps a world record. The competition on the domestic beer market is supported by a law, accepted by Czech parliament against the strong resistance of Czech government in 1995. The law protects small beer producers by providing them tax discounts. The market is practically closed to imports owing to the high quality and low price of the domestic beer. The price of beer increased in the period 1990 - 1995 by factor 2.6, i.e. it followed the increase of wages in the same period. Comparing this price increase with prices on car market, one should have in mind that during the era of planned economy the price of beer was artificially kept low and prices of cars high. Even if big foreign producers tries to obtain control over the two biggest and most famous Czech breweries (Budweiser and Pilsner) the beer market is still nearly a perfect competition with half a liter of bottled beer for less than 0.25 USD. The tax discount provided to small breweries generates a certain overproduction of beer which is not exportable due to high import duties in the neighboring countries and also owing to poor marketing activities of Czech beer producers. The tax discounts scheme provides an example of a perfectly working blocking effect. Banking services. The number of banks in Czech Republic increased dramatically after the fall of the communist regime: from 4 to 38, not including the new branches of foreign banks. A working banking system was essential for the success of the economic reform. On the other hand, a limited amount of free capital, insufficient experience in banking techniques and lack of suitable premises made from this fast start a rather risky operation. Even if banks intensively advertise their services and bank branches form a relatively dense network all over the country, the bank services are far from being perfect. Interest rates from short term and medium term deposits are lower that the rate of inflation, so that the real interest rate is negative. In case of long term deposits the best what one can obtain is a real interest rate under 1%. On the other hand, credits are extremely expensive and for small entrepreneurs not easily obtainable. Some banks lost large proportion of their capital by providing risky loans. Two of the banks collapsed shortly one after another and the customers lost their deposits. To prevent a complete loss of confidence into the banking system, the National (=central) bank covered losses of some further banks converging to a bankruptcy. The monthly average (!) wage in banking sector was in 1995 over 15000 CZK, a maximum from all sectors of the national economy. For comparison, a basic monthly salary of a university professor is 12000 CZK. The characteristics of the present Czech banking system are rather out of sphere of standard textbook descriptions. The best approximation is probably to classify the market with banking services as a collusive oligopoly supervised by central bank. * * * From examples presented above one can see that emerging Central European economies may not be exactly the market economies. But it does not mean that they are not doing well. In case of Czech Republic, the GDP growth is about 5% and unemployment rate under 3%. If it were not for 9% inflation rate, this might be nearly an ideal economic system.