Certain key aspects of the concession system are important to our theoretical exposition and these are: (1) the distinction between resource owner (the municipality) and the resource user (the concessionaire); (2) the role of information costs in the bidding process; (3) the role of elasticity of supply in determining the relationship between the concessionaire's selling price and his buying price (from gatherers); and (4) the influence of expected policing costs on the amounts that concessionaires are willing to bid and thus on the resource rents that can be earned by the municipality.
A theoretical model of the milkfish fry concession system was first described in Chong, Smith and Lizarondo (1982). This study examined the system under two alternative assumptions regarding the shape of the sustainable yield (or total revenue) curve. One possibility considered was that it is of the shape depicted in the familiar static economic model of the fishery as in Figure 1. Such a shape implies that biological over-fishing of the milkfish fry is theoretically possible. Since the fry fishery, however, is based upon capture of unmetamorphosed stages of milkfish which, if left in the wild would have a natural mortality of over 99.99 percent 2, it is by no means certain that biological over-fishing would occur, no matter how intensive the fry gathering effort. It is far more likely that gathering costs will be such that the open-access equilibrium is reached before the maximum sustainable yield. Therefore, for purposes of the analysis that follows, we shall use a model as depicted in Figure 2, where biological over-fishing is not possible within the relevant range of gathering costs.
In Figure 2, the open-access equilibrium with no concession fee is achieved with a level of fry gathering effort E1. At this level of effort, the average fry gatherer is earning his opportunity costs (defined as social rather than private opportunity costs) only and no resource rent is generated by the fishery. Increases in resource rents are possible in the fry fishery but only if the effective effort and associated costs are reduced. A sole owner of the resource with complete control over the gathering effort would limit effort to E2, thus generating the maximum possible resource rents, Max (TR-TC).
The existence of public bidding for the monopsonist rights of the concessionaire will also theoretically produce these maximum resource rents, but only under restrictive assumptions of complete information about expected catch, returns and costs, including policing costs. 3 In Figure 2, given this ‘perfect knowledge’, concessionaires will incorporate these expectations into their bid and on average over time the successful bidders will be willing to bid that concession fee (L) which is equivalent to the maximum resource rent. Because the concession fee (L) is a fixed cost, the new total cost curve (TC+L) will be parallel to the original cost curve (TC) and higher throughout by the amount of the fee. In such cases, the resource owner (the municipality) will earn the full resource rent and the resource user (the concessionaire) will earn his opportunity costs, plus possible ability or efficiency rents. The concessionaire will earn none of the resource rents. Furthermore, due to the assumed perfect knowledge among bidders and the existence of a highly competitive product market, the concessionaire will be unable to earn any monopsony profits.
If, as is more plausible, there is less than perfect information available in the bidding process, the municipality will no longer earn exactly the full resource rents. If one of the bidders has expectations (which are later fulfilled) that catch and earnings will be higher than believed possible by other bidders and the municipality, he can be expected to bid sufficiently high to win the bid but less than the hypothetical fee L in Figure 2. On the other hand, if he underestimates the costs of policing his monopsony rights he may have overbid, in which case the municipality will earn more than the full resource rents and the concessionaire will earn less than his opportunity costs. Policing costs are especially important because smuggling of fry by fry gatherers to non-concessionaire buyers is a continual headache for concessionaires.
Smuggling occurs because fry gatherers are attempting to earn some part of the resource rents for themselves. Under the concession system with monopsony rights awarded to a single individual (often financed by large fishpond operators in the Manila area), gatherers can hope to earn on average no more than their social opportunity costs. This would, of course, also be the case under open-access equilibrium, but the average cost of the catch would be higher in the latter case. As stated earlier, the concessionaire has no direct control over the gathering effort; the only way that effort (and average costs) can be reduced is if he reduces the price paid to the fry gatherers. Because some price elasticity of supply can be assumed, the reduced prices will drive those gatherers with better paying opportunities elsewhere out of the industry, and thus reduce the total number of gatherers employed. The departing group would consist of all those whose average gathering cost is higher than the reduced price; those with lower average costs would remain in fry gathering. For those that remain, the strong temptation exists to sell their fry for higher prices to buyers other than the authorized concessionaire.
2 This seems reasonable for the high fecundity milkfish, given the estimates for other species that have been made by Hempel (1963) and Dahlberg(1979).
3 Costs of concessionaires can be divided into direct costs (equipment, etc.), cost of the concession licence, information costs and policing costs.
Figure 2 Hypothetical relationship between gathering efforts (E), total revenue (TR) and total cost (TC), with and without concession fee
Smuggling of fry in this manner is more than a theoretical possibility; in fact it is prevalent in most parts of the country, especially Mindanao where enforcement of the concessionaire monopsony rights is difficult and costly due to lack of peace and order (Smith, 1981). At the extreme case where smuggling is totally uncontrollable, the fry fishery will revert back to the open-access equilibrium and the municipality will earn no resource rents because no concessionaires will be willing to bid for the monopsony rights to the fry ground in question. In most fry grounds, the reality is somewhere between no smuggling and total smuggling. Concessionaires expect to incur some policing costs (e.g., armed guards) but are in most cases not willing to incur the high costs that would totally inhibit smuggling. Consequently, in most cases, municipalities will earn somewhat less than the maximum possible resource rent.
One last area of theoretical discussion relates to the relationship between the concessionaire buying price (Pb) and selling price (Pm). In the usual exposition of monopsony behaviour, the practice is to examine supply curves and prices for a single input, such as labour. Henderson and Quandt (1971, p.239–242) for example, examine the case of a monopsonist who uses a single input for the production of a commodity which he then sells in a perfectly competitive market. The typical milkfish fry concessionaire fits this characterization, buying fry as the major input and selling it on the open market in competition with other concessionaires. If the supply curve for the input (fry) is assumed to be positively sloped (i.e., not perfectly inelastic), the price which the concessionaire must pay is an increasing function of the quantity he purchases. Conversely, reductions in purchases can be made by reducing the price paid (or the wage rate if labour is the single input).
The selling price can be assumed to be competitively determined with individual concessionaires having control over it. The determining factor in the relationship between this selling price and the buying price of the concessionaire is the price elasticity of supply. The greater the elasticity, the closer will the buying price be to the selling price; the lower the elasticity the more divergent will be the two prices.4 The monopsonist will maximize his profits by purchasing a smaller quantity of fry at a lower price than would prevail under conditions of a perfectly competitive situation. The limit to which the concessionaire can push down the fry price is determined by the price elasticity of supply which in turn reflects the social opportunity costs of fry gatherers. If this opportunity cost approaches zero, the concessionaire could pay a much lower price than would be the case if they had alternative employment options.
4 Mathematically, we can state the relationship as:
Pb = ε ÷ (l + ε)Pm
Where,
Pb = buying price (price received by gatherers)
Pm = selling price (price received by concessionaire)
ε = price elasticity of supply
If ε = ∞, Pb = Pm
If ε = 0, Pb = 0
If ε = 2, for example:
Pb = 2 ÷ (1+2)Pm
that is, the buying price will be 2/3 of the selling price. The authors of this paper are preparing a separate paper that deals in more detail with this relationship and conditions for optimization under varying assumptions of information and policing costs.
