Price controls not sustainable in fixing market distortions


Price controls can drastically reduce the incentive for firms to increase supply or invest, leading to wasteful economic activity. FILE PHOTO | SHUTTERSTOCK

A recent Press report shows that nearly half of the tea offered for sale at the Mombasa auction was withdrawn from the trading floor as traders prioritised buying higher-quality grades of the commodity.

The report further states that the teas had previously been offered for sale several times but buyers turned their noses up claiming overpricing.

The explanation given was that some of the commodities had been recycled but were still being sold at the same price.

The root cause of the issue was the introduction of a minimum price of $2.43 per kilo of teas in 2021, ostensibly to cushion farmers from below-cost prices.

This is an example of a well-intended policy intervention that can end up with unintended bad consequences.

The practice of price controls is hundreds of years old. Its proponents argue that these measures reduce prices by curtailing producer and middlemen brokerage incomes.

Secondly, they posit that controls have had indirect non-economic effects like convincing citizens that profiteering is under control and that the economic burden is fairly shared.

Thirdly, in the face of high inflation, monetary authorities have tended to set statutory price limits without resorting to higher interest rates.

Lastly, in less competitive markets with monopolistic firms, price limits are said to ensure the availability of specific goods or services.

The key question, therefore, is whether effective competition is preferable to price control.

Free market economy supporters argue that price controls do not address the underlying cause of inflation. Excess demand will still exist.

If inflation is caused by a shortage of goods and increased input cost factors, this situation cannot be resolved through price limits.

In fact, price controls can drastically reduce the incentive for firms to increase supply or invest, lead to wasteful economic activity as people queue to access limited goods and encourage the proliferation of the black market economy.

With regard to maximum price setting, they seek to reduce prices below the competitive equilibrium price.

Price ceilings are advantageous to consumers since it curbs the appetite to exploit them by monopolies and are usually reserved for highly important goods in the market such as staple foods.

In contrast, minimum prices offer producers a higher income, disadvantage consumers through high prices of goods and services, and encourage oversupply, therefore, creating inefficiencies.

Resale price maintenance, a form of minimum pricing, is illegal under the Competition Act No. 12 of 2010 since it disincentives undertakings from competing on the merits, including innovating. Worse still, consumers end up paying more for goods and services.

For example, it is illegal for manufacturers or suppliers to impose minimum prices in distribution agreements or offer retailers a discount if they adhere to the floor prices.

It is also an illegality to decline to supply retailers that retail goods/services below the minimum price or sanction and threaten them.

Producers and distributors cannot hide behind distribution agreements to set restrictive pricing policies on minimum pricing.

Equally, they cannot try to use apparently legitimate policies such as licensing to conceal RPM practices.

However, suppliers can provide a recommended resale price (RRP) or set maximum retail prices but it is illegal for them to dictate the actual price.

This illegality extends to policies that set a minimum advertised price for online sales. Price controls as an alternative to a liberalised market do not, in the long term, benefit consumers.

The preferred policy interventions would be providing subsidies such as agricultural inputs to increase production and supply to the markets, encouraging competitive markets by discouraging non-tariff barriers, and considering progressive taxation.

The writer is a manager, of enforcement and compliance, at the Competition Authority of Kenya.

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