Do captive markets make economic sense?

Wind farm in Ngong PHOTO: XN Iraki

NAIROBI: There was recently an outcry over one public university’s requirement that all new students buy laptops from it. This was an example of a captive market.

There are other examples; the Government at one time required that seminars and workshops for its employees only be held in Government-owned facilities. This ensured they have a ready market. A slowdown in tourism, however, made this untenable.

Schools are also captured by uniform suppliers. They direct you to buy uniforms from certain suppliers. This often leads to overpricing and low quality. Ever wondered why school uniforms are so expensive?

One way to reduce the cost of education is to abolish uniforms. While we are great at copying Western political systems, why not simple things like students wearing casual clothes to school? Who does not know that we are not equal?

A firm might require that employees eat at the firm cafeteria, use company transport and so on. If the Government makes cars, it may require its departments to buy cars from its manufacturers. Some unscrupulous employers require their employees to buy products from designated shops or outlets.

This goes further. A foreign country giving you a scholarship may require you to use its airlines.

Captive markets are very tempting; they assure you of a ready market.

One of our public universities has about 80,000 students. If they all buy laptops, food from the cafeteria, books, and other products and services from the institution, that’s good business. That is why in some countries you hear of university towns. They go to sleep when the university closes. Many towns in Kenya do not have a population of 80,000.

Even politics at one time had a captive market – we were all one-time members of Kanu. We paid yearly subscriptions, which gave the party lots of money. One wishes they had invested it.

KBC once had a captive market; we had to watch the only TV and radio station in Kenya that closed at midnight to open at 5am.

Regulatory approval

Security also drives captive markets. For example, most military forces only procure from certain markets, mostly domestic, because they do not want their secrets leaked to their competitors. Can you imagine the US giving a foreign firm the contract to build stealth bombers?

Are churches captive markets? Intellectual markets tend to be captive too, with generations of scholars stuck with dated paradigms.

Captive markets are nothing but monopolies. They give customers no choice, which leads to poor services. That is why kiosks often cook very fresh food – competition forces them to.

It would be interesting to hear the Competition Authority of Kenya’s take on captive markets.

In many countries, there are regulations against captive markets to give customers choices. That is why mergers and acquisitions are subject to regulatory approval.

Captive markets are a step back in time and should not be allowed. Economics is about choices. Japan makes cars, but it also imports them. France makes wine, but also imports it. It is not just about money, but choice and freedom.

When the Kenyan economy was liberalised in the 1990s, we complained that prices increased – but we got more choices. Think of the services and products you use daily. Suppose there were no choices? Even if you had money, life would be boring. What happened to Kenyans who studied in former communist countries? Just hold a conversation with any of them.

Captive markets have another big drawback: they discourage innovation, the engine of economic growth. Why improve on your products or services if you are assured of a market.

By importing what they make, nations force firms to be innovative. In the long run, customers get better services and products, while new firms are spawned and the economy grows.

Some have argued persuasively that captive markets can be genetic. In some communities, it is very hard to get a wife or a husband – they want to marry among themselves. Such captive marriages, apart from perpetuating contempt, deny young men and women choice and genetic diversity.

The age of captive markets is long gone, and no one should make any attempt recapture it. Even communism, which captured our minds and thought process, could not resist the gale of freedom.

Today, economic choice co-exists with lack of political choice in China, one of the great mysteries of our times.

Captive markets make sense only in the grave, where unanimity of thought thrives.

Finally, I am writing this from a hotel that is a captive market in tourism training because power to my residence was cut by a firm that has a captive market ....

The writer is senior lecturer, University of Nairobi.

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