Inflation and price fixing

Niaz Murshed discusses how existing legislation may be enforced by the government to ease our inflation woes

While watching the news on a cable TV channel recently, I came to know about a few arrests made by the authorities for price fixing. The questions that automatically came to mind were: How may these arrested persons be brought to justice? What legislation in Bangladesh deals with price syndicates?

Price fixing
Price fixing entails collusive behaviour among competitors. If the reader is not familiar with it, all he has to do is wonder why all the fruit vendors ask for exactly the same price when he goes to market to buy a kilo of apples. The same practice adopted on a larger scale, and in an organised manner, often leads to price levels much higher than desired by the market.

This article looks at the relationship between price fixing and inflation. In particular, it sheds light on the legislation relevant to the issue.

What exactly is this legislation?
Strictly speaking, there is no such thing as "price fixing legislation." It only works within the broader framework of a competition policy. It is competition that the law protects. The way it works is as follows: if you make a collusive agreement regarding price, then no further proof is required that you have affected competition in a way that is detrimental to the well-being of the consumers.

The law refers to it as a "deeming" provision. Under such clauses price fixing is prohibited per se, that is, no matter what.

The obsolete law
Although there is much debate in the media regarding the issue of price syndicates, existing legislations or their enforcement are hardly ever discussed in any of the newspaper articles or in the television talk shows. In most cases, the focus tends to move tangentially, leaving the listener or reader rather uncertain regarding appropriate action. In fact, the piece of legislation relevant to price fixing in Bangladesh is quite difficult to get hold of, and even after I had discovered it in the law indices, it was not clear if it was still operational.

The MRTP Ordinance 1970 (PC vol17 pp.508-523) was written under martial law 37 years ago, and some of the clauses make no sense in today's context. As it stands today, the ordinance is as good as obsolete.

Interestingly, the price fixing under collusive agreements between competitors was prohibited even in that ordinance. If the ordinance is still operational, price fixing is theoretically still prohibited under it:

"Unreasonably restrictive trade practices shall be deemed ... If there is any agreement between actual or potential competitors for ... fixing the purchase or selling prices or imposing ... with regard to the sale or distribution of any goods or services."

However, it is limited by a few exclusion clauses drafted in old US anti-trust metaphors. If it were a part of any comprehensive national competition legislation today, as mentioned earlier, the exclusion clauses would not have been there.

As we can see, the concept of a competition policy is no stranger to us. We just need to revisit it and put things into perspective, in particular, with regard to its relationship with the current situation.

The inflation debate
There are three major reasons for the unabated inflation that we face today :
*Excess money supply. Pressure from exports earnings, remittances, etc (pointed out prudently in "Where is Bangladesh Bank in the Inflation Debate" (June 14, The Daily Star, Faisal Salahuddin).
*The structural issues of the market. The existence of cartel and exploitative behaviour of actors within the supply chain (there are the issues relevent to competition policy and this article).
*External shocks. Oil prices, exchange rates, economic factors in neighboring countries, etc.

The point to clarify here is that the excess money supply is definitely the largest contributor to the inflation that we are faced with. Therefore, no matter how well you handle the structural nuances, it will remain as the major problem. However, the reverse argument is also true. That is, even if you manage the monetary policy well, you need to rectify your market structures sooner or later. The two issues are very much independent in nature; while one relies on the central bank and its policies, the other relies on legislation and their proper enforcement.

On the other hand, external shocks are part of any modern, open economy. It is very difficult to predict them, and it is even more difficult to insulate a market from them. This makes the structural issue and the competition policy all the more relevant to the anti-inflation campaign.

The main legislation
The anti-price fixing legislations fall under a category known as the Restrictive Trade Practices (RTP) legislation. It is the mainstay of a competition policy, and definitely the most relevant legislation pertaining to our inflation debate (not "anti-hoarding law," whatever that is). These sets of legislations are usually designed to safeguard competition against anti-market forces which "substantially lessen" it. This concept follows from the US anti-trust law. In particular, the Sherman Act of 1890 and the Clayton Act of 1941 were the basis of its origin.

The idea behind RTP is simple. It is assumed that competition is beneficial to market allocation and productive efficiencies, thereby reducing prices. This leads to obvious benefits to the consumer. However, given the chance, some businesses tend to monopolise the market in search of higher, or supernormal, profits, as in the case of our price syndicates. RTP legislations prohibit such behaviour.

The Sherman Act 1890, proposed by Senator John Sherman and enacted by President Benjamin Harrison, was the first of its kind, and stated:

"Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony …"

There are basically three types of RTPs which affect the market:
*Horizontal Acts, or collusive behaviour among competitors; e.g., price fixing, bid rigging, market sharing, etc.
*Vertical Acts, or agreements among buyers and suppliers; e.g. minimum sales price (also known as resale price maintenance, misuse of market power, etc).
*Mixture of horizontal and vertical acts; e.g. mergers and acquisitions.

The economic benefits from prohibiting vertical acts are intuitively less clear than that of the horizontal acts. Therefore, as far as we are concerned, the focus should be on horizontal acts or collusive behaviour among competitors only.

This move will serve two purposes. Firstly, it will address the issue of price fixing directly, which after all is the order of the day. Secondly, bringing in the prohibitions against collusion will also serve as an "introducer" to the public, for the legislation may be difficult to comprehend at first. We have to understand that, in a country where killing of the innocent go unheeded at times, the niceties of the Sherman Act may not be appreciated overnight.

However, the other categories cannot be pushed under the table. For example, the time for dealing with mergers and acquisitions may arrive sooner than we think. What if tomorrow one of our cell phone companies wanted to take over one or more of its competitors? Should the government allow it?

Therefore, in our context, it is better to enact all of RTP together. However, enforcement should be selective. The horizontal prohibitions should lead the way; the other ones should follow according to need.

An important by-product
The second set of legislations relevant to our inflation debate concerns consumer protection (CP). The primary role of CP is to protect the consumers against unfair practices. Its positive effects on competition and, hence, on prices of commodities come almost as a by-product. The Australian Trade Practices act 1974 describes the scope of consumer protection as "for its own sake and for the sake of competition." Although its primary objective is to make sure that the ordinary consumer is not cheated, in effect, it also enhances competition.

It is assumed that a certain behaviour, called "unconscionable conduct," is responsible for higher prices. As far as we are concerned, it involves unscrupulous or immoral behaviour within the supply chain of our market. It may occur at the very beginning, when the product moves on to the suppliers (middlemen in our case) from the producers. It may also take place at the other end, in the market place, were sellers take advantage of the weaker bargaining power of the buyers.

It was very encouraging to see that the Consumer Association of Bangladesh (CAB) had pushed a legislation called Consumer Protection Act 2000, which actually incorporated the points mentioned above. The draft proposal also identified that our supply chain problems have a certain "Bangladeshi flavour," hence, they should be handled accordingly.

But where is CP Act 2000? It is already the middle of 2007. For the reasons mentioned below, as far as CP is concerned, time is of the essence.

Tip of the iceberg
One has to realise that the remedies discussed are mostly enforcement based. Specialised units, independent statutory bodies, or parts of government departments, are normally given the responsibility of enforcing the law. The duties of this body would be varied, to say the least; starting from case by case administrative assessments (mergers) to pure "economic espionage" (price fixing). Well-trained technical staff would be needed to ensure that the legislation is correctly enforced.

In addition, jurisprudence must also be given time to develop and align itself with the idiosyncrasies of the enforcement. The situation in practice may be different from the one originally perceived in the legislation. Adjustments must be made to take care of loopholes.

For the reasons mentioned above, our government should introduce the legislations as soon as possible. We have to remember that enactment of the laws in this case is merely the beginning, and not the end, of the solutions.

Conclusion
I have heard experts talk about the current inflation and the government's role in it. The argument, often very elegantly put forward, is that the economy cannot be run by an iron hand. You need an "invisible hand" to tame it. They usually refer to the contingency plans adopted by the government to stabilise prices.

However, to deal with the cartels and the unscrupulous conduct, one would need to use a firm regulatory hand ultimately. RTP and consumer protection is based on the reverse argument of "laissez-faire." The government just needs to get its direction right. These are cases of market failure, and to rectify the situation the first thing that is needed is comprehensive competition and consumer legislation. And it is also vitally important for our national interest that the new law be an enforceable one.

Niaz Murshed is a graduate in Economics, University of Pennaylvania and the first chess grandmaster of the sub-continent.