March 31, 2009

Uganda Discovers Coca Cola

Though Edris Kisambria, in an article describing the enormous gains a Coca Cola bottler in Uganda experienced, uses the word 'market' quite eloquently to describe the story, one might doubt he truly understands its full implications. In fact, an economist would argue that Edris' use of the word isn't economic at all, for his explanations of what happened in the 'market' for bottled beverages in Uganda entirely escape obvious, fundamental microeconomic principles. Further, microeconomic models capture so much more detail of the enviroment Ugandan suppliers faced in making their decisions than the author's un-informed speculation. Edris' article goes to show how passing by basic axioms of economic reasoning, as such a little mistake, can cause so much of the true picture to be lost.

"The extra capacity that CBL has built up has enabled the company to supply the Rwanda market with Pepsi Cola products. But the thing that is pushing CBL to break new ground really is the new products they are brining to the Uganda market" (Kisambria).

Is this analysis a correct assumption? Was indeed the advent of new bottled beverages the sole cause of CBL's (Crown Beverages Limited) increase in profit, market share and number of beverages they supply to Ugandans? A look into the story Kisambria recapitulates will show that his logic falls short of not only the actual economic cause of CBL's success, but misses the real story entirely.

According to the article, CLB, a Coca Cola bottler in Uganda, "invested heavily" in new capital and more labor to expand their output of Mountain Dew, and other one liter bottled beverages in response to a mighty surge in demand which "outsripped" their output significantly. The supply response granted them a huge increase in profit. This is the true story as told by economics, but Kisambria describes it as the company "growing significantly" and increased their soda production by "22 million bottles a year." His words do accurately describe, very generally, the choices CBL, as an individual supplier made in response to a change in their economic environment- the surge in demand for soda. But his description only gets the general idea.

The story microeconomics would tell reveals a lot more crucial details and insight into the indvidual behaviour of Ugandans, and throws out Kisabria's assumption to the cause of CBL's wealth quoted above. The economic story offers a much better explanation.

Economist's model of perfect competition shows a large shift in the market demand for soda. For some reason, perhaps that the introduction of a bottled beverages market at all caused consumers to substitute Mountain Dew for other bevarages dramatically, marginalizing other beverages as substitutes, or that the price for other availible substitutes went up, Ugandan soda drinkers increased their demand by four times more than what the company had planned for (as quoted in the article by CBL's Cheif Executive Officer) (On the consumer choice model, each consumer's demand curve would've been relatively flat with Mountain dew on the horizontal axis, implying their demand for mountain dew with respect to price was elastic). Then, as the CEO says, CBL attempts to make up for this and pursue the prospect of profit from the increase in price by investing in new captial and more labor to increase their output by 80%.n (To note, it can be assumed that CBL operates in a perfectly competitive market because the article and CEO's words imply that they had no monopoly power to keep price above marginal cost; they took the price as given as it increased and confered a supply response to meet a new competitive equilibrium) Because the firm adheres to profit maximizing behaviour, the notion of higher profits from the increase in demand completely drove their the decision to increase output. Also, because the increase in output was so dramatic, an economist can assume that their supply curve was also relatively elastic with respect to price. All of these events cause equilibrium price and quantity in the market for Ugandan bottled beverages to increase drastically. CBL experiences higher profit from high prices and more output.

What does the economic story suffice to say about Kisambria's idea that the quality of the beverages CBL produced solely acted to increase their profits? As microeconomic analysis as above points out, the quality of CBL's product had absolutely no effect on the firm's decision to supply more or their benefit of higher profit. It was supply and demand acting together in the market place as Alfred Marshal wrote, that brought them to that point. Kisambria's assumption completely leaves out the demand side of the market, and misses the fact that the only reason CBL behaved as they did was because they are profit maximizers and responded to the increase in demand on the sole incentive for higher profits. The conditions they faced completely dictated their behaviour. Though the quality of their beverages might count if the firm were in competition with few other firms in monopolistic competition or oligopoly to keep customers, and does count to prevent consumers from substituting other beverages, it economically impacts the supply decision in no sort of way. Microeconomics captures the important details about indivdual decisions.

Kisambria's error should serve to show the conclusions one can come to when they overlook the basics of economic thought in analyzing an everday day instance of scarcity like Uganda.

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