Supply and Demand in the Philippines – Why some Filipino Businesses Fail
I shouldn’t say “fail”, though I’m sure some Filipino businesses have failed. They don’t do as well as they should due to supply and demand concepts. Or, rather, failing to apply them.
Josie, my wife, and I were discussing this very thing this morning. What I’m about to tell you doesn’t apply to the big retail chains and restaurants (both regular and fast-food). It applies to the small “mom and pop” type businesses.
I can only attribute their business losses to a lack of education. I learned basic economics, like the law of supply and demand, when I was still in high school. Do they teach it here outside of college?
The Law of Supply and Demand
The page for it a Wikipedia describes it like this:
In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.
What I learned was a bit simpler. If the supply is great and the demand is great, the price remains stable. When the supply drops and the demand remains the same, the price goes up. When the supply remains the same and the demand goes down, the price goes down. If the supply is low and the demand is low, the price remains stable.
This “law” doesn’t apply to everything, of course, but it does for most retail products. Except in the Philippines.
Greed Takes Over
Josie asked me, a foreigner, why Filipino businesses do the stupid things they do. You have to understand, she’s used to how things work in the United States, where she spent most of her adult life (before moving back here with me).
If a particular item becomes popular, a Filipino business will raise the price. It doesn’t matter what the supply side looks like. It doesn’t even matter if you can get it somewhere else at a lower price.
In fact, the business will raise the price to a point where no one will buy it from them anymore. It’s only then that they lower the price again.
It has to be greed that takes over. The chance to milk every penny (or sentimo or centavo here) they can get out of it as fast as they can. It’s the only thing that makes sense to me.
Never Mind the Tipping Point
I keep telling Josie that if I had the resources, it wouldn’t be difficult to put many local Filipino businesses out of business.
Most businesses try to reach a balance. They want to maximize profits without losing customers. It’s the wrong attitude. They should be focused on collecting as small a profit as possible and still remain viable. Take care of the overhead and pocket a smaller amount.
I understand the risk involved and how businesses use profits as protection against slow periods and legal challenges. If they focus on giving the best deals they can to their customers, they won’t have to worry about it in the long run. The volume of sales is the key to success.