Is the Point on Sale Business tending towards a Perfect Competitive Market

Photo by pressfoto from Freepik

By

Chimere Iheonu

Date Published

September 7, 2022

Category

Insight

The high unemployment rate in Nigeria has forced Nigerians to seek alternate means of livelihood.  This has led to the establishment of small businesses, including the Point-of-Sale (POS) business. The POS business is one that has become present in every nook and crevice of Nigerian cities. A large number of these businesses could be located on a single street. On many streets, particularly those that are busy with economic activities, you could see dozens of these businesses, if not more. Even while this business has broadened financial access, which further boosts economic activity, it has evolved into a market structure with the features of a perfectly competitive market. Economic theory is of the opinion that the perfectly competitive market is theoretical and unrealistic, and favors monopolistic competition, monopoly, and oligopoly as more realistic market structures. While this is true, the POS business is defying economic consensus and providing a realistic case of a perfectly competitive market.

How does the POS Business Operate?

The POS business came into existence in 2013 after the Central Bank of Nigeria (CBN) introduced the agent banking system. The business makes it possible for agents to carry out cash transactions with a customer’s debit card, and in return, they profit from the charges on each transaction performed by customers. This has paved the way for improved financial service delivery and penetration, reaching those who were previously unbanked, particularly in rural Nigeria. 

Additionally, this has decreased long queues at banking halls and promoted financial inclusion in areas where financial services were typically unavailable. Customers can perform different transactions at the POS business, including withdrawal, transfer, and bill payment. The commission on each service generates income for the agents. The POS business has a low barrier to entry and requires little startup capital. While this article does not aim to engage in the specifics of establishing a POS business, there has been a sharp rise in the number of POS businesses in Nigeria, attesting to the fact of its ease of establishment.

The Perfectly Competitive Market

One might have a better understanding of the perfectly competitive market by outlining its characteristics. For starters, there are a lot of buyers and sellers in this market structure. This is due to the market's ease of entry and exit, one of its most noticeable characteristics. New sellers, firms, or business establishments can easily enter and participate in the market. It is also easy for these firms to exit the market whenever they desire. Furthermore, the products that are created or sold are identical or homogeneous, which means that each seller or producer sells the same commodity.

In addition, sellers are price takers in this market structure. This means that no seller can influence market pricing. This is because consumers are well-informed about commodity prices, and when one seller raises the price level, consumers move their demand to other sellers competing for customers. The absence of government regulation also distinguishes the market, and sellers can only make or lose money in the short run. In the long run, there are no profits or losses because there is an infinite number of sellers of the same identical goods.

Gauging the Features of the POS Business with the Perfectly Competitive Market

As mentioned, a large number of buyers and sellers and the ease of entry and exit are the key features of a perfectly competitive market, and these apply to the POS business in Nigeria. The POS business is characterized by a large number of buyers and sellers. Thus, it is not atypical to see tens of POS outlets on a single street, given the relative ease of establishing the business. 

Away from the easy entry and exit, money, which is the commodity sold in the business, is identical and homogeneous. As an example, ₦5000 naira is exactly the same irrespective of which POS agent is used, making the commodity homogeneous. Additionally, since customers are fully aware of the prices associated with each line of transaction, no POS agent has the sole ability to alter transaction fees. A POS agent loses customers to another agent if they raise the transaction charge. Given that they operate in an extremely competitive market, POS agents are therefore price takers.

Conclusion

Due to the low startup costs and ease of entry, the POS industry has experienced tremendous expansion in recent years. While this has cushioned the negative effect of unemployment in Nigeria, the rise in the number of these businesses has led to the market tilting towards a structure deemed to be unrealistic. Although profits are being made by POS agents, a continuous increase in the number of POS businesses will see profit tend to zero—a long-run characteristic of the perfectly competitive market. To put this into perspective, no individual POS agent can influence the market price. However, the continuous increase in the number of these businesses will affect overall supply, pushing prices down. Losses will lead to the exit of some of these businesses, and market prices will begin to rise. This phenomenon will persist until a long-run equilibrium is reached.

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Disclaimer: This information in this article is NOT investment advice. It is intended for information and entertainment purposes only.

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