Addressing the pricing issues

James Kon

While shopping for groceries recently, I overheard a discussion on the hot topic of rising commodity prices in the country between two housewives.

One housewife voiced her growing concern of the price increase in food and other commodities, while another suggested that the authorities should directly intervene by putting a cap on the prices of commodities through price control.

It is easy to think that price control can solve the issue, but it also has serious long-term implications to not only on the local business environment, but also consumers.

The COVID-19 pandemic has not only impacted the health of the world population but the lives of many, especially with an upsurge in the prices of necessities and food caused by shortages from disrupted global supply chain and production.

A majority of countries are still affected by COVID-19 and are in a certain degree of lockdown. This has not only disrupted full production of commodities but also export and shipping, leading to the shortage of supplies as production was halted or shipping lines were restricted.

According to the World Bank, global food prices measured by the World Bank food price index, rose 14 per cent last year.

Although the deadly and contagious disease is under control and the country has been without any local transmission of COVID-19 for more than 270 days, Brunei Darussalam is not exempted from the shortage of supplies and increase in prices. Undeniably, the increase of prices is a cause for concern for the public locally and globally.

The recent fiasco surrounding the shortage of chicken further fuelled the shortage caused by panic buying among some households.

With the increase of prices of food commodities, understandably, the public is looking for the authorities to have a direct intervention to tackle the issue by regulating or controlling through price caps or setting of maximum prices.

However, the measure of regulating price of goods is not a real solution and in fact could ill impact the local business environment and consumers as well.

This is because price is a signal of underlying demand and cost. As such, the price increase’s underlying factors must be carefully assessed before prescribing policy measures or regulatory alternatives to address the root cause.

A price intervention policy by setting maximum prices on goods will be counter-productive if the increase in price is due to the rise in cost.

According to the Essential Food Price Monitoring Report by the Department of Competition and Consumer Affairs (DCCA) of the Department of Economic Planning and Statistics (JPES) on January 25, price increases of some key food commodities are due to multiple factors, including: increase in cost of goods imported; the increase in price of input; differences in business costs such as source of import, logistics and supply chain disruptions as countries outside Brunei are still very much affected by the pandemic; and a surge in demand when supply cannot be met.

In other words, if supply has been severely constrained, at least partly because of sharp increases in the cost of inputs acquired via international supply chains, controlling price would not be effective to provide suppliers with incentives to increase output. Therefore, setting prices in the name of preventing the price from further rising will not help consumers or alleviate shortages.

Price control cannot address shortages. Fixing prices at lower levels will merely enforce existing demand patterns. This will result in worse shortages for many consumers down the line; over time, affecting supply and the quality of goods offered in the market. This backfires instead of helping enhance consumers’ welfare.

The DCCA as the price control law enforcement agency has gained vast experience and insights on the impact of maximum price setting, which potentially affects the choice of goods available in the market. This is because maximum price setting cannot adequately take into account individual business costs, which are very different from business to business.

For example, take the choice of infant milk powder brands in the Temburong District before the Sultan Haji Omar ‘Ali Saifuddien Bridge was opened in March last year. There were only six brands found in Temburong, from a total of 13 brands in the entire Brunei market. Retailers chose not to sell some brands when the maximum price set on products may not provide adequate profit incentive, given that they may have a relatively high logistics costs to cover. When businesses simply chose not to sell them, consumers are left with less choice to choose from.

Today, one may find more choice of powdered infant milk brands available in Temburong, from six to nine brands from a total of 13 brands in the entire Brunei market, with the number of products almost doubling from 46 to 90. This is attributed to the opening of the Temburong bridge in March last year, which has brought about a reduction in business costs, specifically transport costs.

Nevertheless, while the above illustrates that a policy to set maximum price may well prevent the market price from rising above a certain level, it is certainly not an easy task to determine what that cap should be, as businesses have differing cost structures.

However, price capping policy may be relevant to prevent consumers from being exploited by businesses using that abuse their monopoly power; in other words, when price increase is an exploitative business practice without objective justification.

This type of conduct may justify price intervention policy; however, this must be carefully assessed to decide between price intervention through price caps or other appropriate regulatory alternatives to be considered.

It will be counter-productive to set prices over a long term. While price intervention may be used as a short-term response to help vulnerable households, policy instruments to manage the impact of price increases must be designed carefully with three goals in mind: they should protect vulnerable consumers; they should maintain and create incentives for producers, supplier and retailers; and they should be financially sustainable.

As part of the effort to address price issues, the DCCA has been actively monitoring the prices of essential commodities which are significant to the public and the economy by compiling the trend of retail price data and cost of goods, to enable price trend analysis and to assess the cause of any price increases, in order to assess appropriate measures in addressing those concerns.

It is important to note that measures to counteract market issues are very much cross-cutting in nature, involving sector regulators to examine policies or regulations which may impact market players and supply level.

This calls for cooperation with the agricultural, food processing and grocery retail sectors, to ensure that supply chains for food and other essential household items remain functional. This is the most effective way to guard against significant price increases during a crisis and to ensure a resilient food supply system.

To encourage and nurture a smart consumer culture, prices of goods being monitored are published on the PenggunaBijak app. This was done for face masks and hand sanitiser from the start of the COVID-19 pandemic until prices and supply stabilised. It is also being done now with prices of selected food commodities on a weekly basis.

This is in addition to the prices of nine categories of daily essential goods that are compiled on a regular basis. These are provided from the participating retailers once a month. This initiative educates consumers on the choices available at retailers to enable consumers to make informed purchase decisions.