Pizza and perfect competition in Pakistan

The pizza market in Pakistan has maybe attained almost perfect competition

A perfect competition in economics is defined as a situation where there are numerous buyers and sellers, such that the market price of a product is beyond control of individual buyers and sellers.  A novel concept, but there aren’t many products which have perfect competition.  There are always structural inefficiencies, or a lopsided market structure where sellers control price through an informational advantage, government protection, or simply high barriers to entry among other factors.

Pizza is one such product, a market for which in Pakistan has maybe attained almost perfect competition.  Popularized in the country during the wave of globalization in the 90s with the opening up of Pizza Hut.  A fairly new product, considered a delicacy at that time for many.  Fast forward thirty years, and Pakistan now has thousands of restaurants (or pizzerias?) serving one iteration or the other of a pizza.  

Everyone’s expectation of a pizza is different, the purists prefer the Neapolitana style, the tourists may like the New York style, the local taste buds may prefer the chicken Tikka variant, while someone from Scandinavia might prefer reindeer meat as a topping.  Every jurisdiction has a unique preference which adds a schumpeterian layer on what is a pizza.  At the simplest level, it’s just dough, sauce and cheese, and that’s what a pizza is all about.

The last few years has seen tremendous growth in places serving pizza at a wide range of price points.  Homegrown pizza chains continue to encroach on the share of multinationals.  Low barriers to entry and evolving taste buds have ensured that there is a pizza available across all price points.  It is entirely possible to buy a large pie from PKR 200 to more than PKR 4000 per pie, depending on the quality of ingredients that one prefers.  Each market segment has a large number of buyers and sellers, who are also price conscious.  Considering low barriers to entry and ease of access to the necessary ingredients, competitive forces keep prices under check with most market participants often offering discounts to increase volumes and gain market share.

Earlier in the last decade, cheese for pizza was mostly imported, but with higher duties and depreciation of the PKR, it created incentive for investment in production of quality cheese locally, eventually resulting in import substitution.  In the premium category, supply chain has a considerable quantum of imports, but as price decreases, indigenization of supply chain also increases.

The market for pizzas in Pakistan pretty much checks all requirements for perfect competition, there is a large number of buyers and sellers, barriers to entry are low, the customer is price conscious, and growth is driven by innovation rather than through rents.  This is in direct contrast to the market structure of many other commodities, and staples, where through price fixing, whether a ceiling, or a floor, economic incentives have been distorted resulting in welfare loss for the consumer, and disproportionate gains for the rent seekers.

It is understandable that such a level of competition cannot be achieved for industrial products, or high-value goods, but if industries are oriented to cater to an export market, then their market is global in nature, and competition is also global.  Moving along the technology curve and enhancing product attributes to remain competitive globally is hallmark of a successful macroeconomic growth strategy.  The case of North East Asian countries is a classic example, where competition was encouraged on a global level, whether that be through acquisition of knowledge or technology, or through market development over the years.  A competitive approach towards growth in a global context is what differentiates the success of North East Asian economies vis-à-vis others.  

The competitive market for pizza is an analogy which can be used for many other industries whether on a local, or global context.  It is competition that creates incentive for expanding the production frontier to catalyze growth and its dividends.  A market structured to benefit only a selected rentier class which results in consumer loss rarely enables sustainable growth over the mid-to-long term.

Ammar H. Khan
The writer is the chief risk officer for Karandaaz Pakistan, an organisation that seeks to promote financial inclusion in Pakistan. He has previously worked at several financial institutions in Pakistan, both in commercial banking and capital markets

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