EDITORIAL: Mission creep on price legislation could harm economy
Why would competition authorities use scarce staff resources on a temporary price hike that’s perfectly logical?
That prices rise when demand for goods exceeds supply is one of the most basic principles of economics, an elementary principle that seems to have escaped SA’s Competition Commission.
The antitrust watchdog made headlines when it announced in January that it was investigating seven mainstream retailers for selling ginger and garlic at prices that were much higher than normal.
It was a curious consequence of new legislation set up under the Disaster Management Act to ensure that companies did not put up prices of essential goods during the pandemic and the government’s three liquor bans without underlying cost increases.
Unable to legitimately buy alcohol, South Africans were either forced into the black market or making their own. For the latter, ginger became a popular ingredient. Together with garlic, it also became popular for its presumed immune-boosting qualities. And so prices increased, just as one would expect, bringing the question of why competition authorities would use scarce staff resources on a temporary price hike that is perfectly logical.
A cynic might argue that the commission was hungry for media presence or was being populist in responding to social media posts demanding action. To be clear, competition authorities are important to ensure a free and fair market and intervene to stop situations in which monopolies and dominant businesses abuse their market power.
Competition in any market allows consumers lower prices and more choice, which is why legislation makes it illegal for cartels in an industry to form and force new entrants from the market. In this case the commission did not even allege collusion between the seven, but relied on what is hopefully a temporary — if ill advised — remedy against price gouging.
The legislation has brought about a situation where the commission feels empowered to intervene in cases where there are spikes due to seasonal factors. As economic theory has it, if the increases in demand for ginger and garlic persisted, farmers and retailers would respond accordingly and increase supply.
Instead the commission intervened. And this misuse of competition law will persist as long as SA is in a state of disaster.
In normal times, the barriers for regulatory intervention and price investigations are high and the companies need to be shown to have been a monopoly, dominant or have more than 35% of the market. In this case pretty much all the big retailers, seven of them, are under investigation.
The curious thing is that the commission, according to its press statement, accepts that whole prices of ginger and garlic rose for legitimate reasons and retailers did not increase their profit margins. It probably foresaw an easy win as the bigger players would most likely settle than engage in costly legislation.
Pick n Pay did exactly that and decided to cap its profit margin and ginger prices for half of March. The commission was eager to tout this as a victory, painting itself as a consumer advocate and encouraging the other companies to do the same.
But is this what competition authorities should be doing, setting prices and disrupting the workings of the market? As one lawyer concluded “yet again, SA has favoured price regulation rather than letting markets work”. Price controls have never worked anywhere and in the long-term stifle investment and lead to shortages.
The purpose of competition legislation is to create a competitive market so that one or two retailers do not control the ginger — or any other product — market and set prices like Eskom does for electricity, meaning consumers have no choice but to put up with its tariffs and terrible service.
Competition authorities do not exist to conduct investigations into seasonal short-term price hikes or propose solutions such as price caps.
The commission says it is not moving away from a free-market economy. “Interventions are only necessary where there is a failure in the market and the competitive process,” it said.
The problem is that it has failed to demonstrate such failure here, and trade & industry minister Ebrahim Patel needs to urgently relook at the legislative changes that made this possible before there is serious economic damage.
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