Monday, October 5, 2009

Competition Commission forced by the SC to discourage competition

Has anyone noticed the Supreme Court's recent instructions that the Competition Commission Pakistan fix the price of sugar? I'm assuming that it is not entirely awake to the irony of a competition watchdog fixing prices. Its Econ 101 Mr. Chief Justice. The way to ensure that sugar finds its optimal price is to strictly impose anti-cartel laws. If each sugar mill is setting its price independently, the retail cost will come down automatically: without an agreement between mills, it is in the interest of every mill to keep its prices as low as possible to get an edge over the competition.

Fixing prices may seem like a more surefire way of doing things but it has proven to be impossible to implement so far. Plus, its notoriously difficult to determine the optimal price. But suppose the government does manage to enforce an ideal fixed price, if and when the production costs of sugar increase, the fixed price will drive mills to bankruptcy, creating a genuine supply crisis. And if the government then decides to raise the price for legitimate reasons it will have a political disaster on its hands. Better to let the market take care of all that and let the CCP do its real job.

2 comments:

Ahmed said...

This is not the whole picture. Minus intervention of the government (i.e. through MNA/Minister Manzoor Watoo) and the court, sugar mill owners were free to fix the price. As a cartel they agreed to increase it by 50 to 60% within days before Ramzan. To break this cartel act government intervened and allowed increase of almost 40% (it is believed that Watoo made a fortune out of it). What no body could explain was that why the price which was around 25 per kg had to be increased to 40+? This precise question was taken up by the court, as it sensed formation of cartel. High Court declared the price after considering all the materials placed before it and also allowed 2 days extra time and specifically asked sugar mill owners to bring what they want to bring on record. Finally, on the basis of data available High court quoted a price which would be very normal to charge keeping in mind the profit to be earned by sugar mill owners. Mill owners and their Association objected to the order on the ground that the High Court did not consider some facts, including the price at which sugar cane was bought last year. However, they did not raise this issue before the court nor presented any documents.

There was one plausible objection to this entire proceedings from certain quarters, that it is not for the court to fix prices and take policy decisions on economy. Although it was under the relevant laws that High Court had taken the decision, but the supreme court directed the competition commission to investigate and come up with a price. Now competition commission is investigating that whether any 'anti-competetive' acts have been done or not in suddenly raising the price of sugar. Also, it will make recommendations on what could be the reasonable price of sugar.

Earlier, there was no intervention and sugar mills were allowed to be in a healthy competition, as you are suggesting. However, as a result of this sugar mill owners behaved as a cartel and fixed an exhorbitant price. Measures are to be taken for breaking this cartel. This is what the courts and competition commission are doing.

If you can notice any illegality please tell, but it shouldn't be a general comment from a passer by.

Sincerely,

Ahmed Bashir

Shayan_R said...

We both agree that the sugar mill owners had formed a cartel and had colluded to raise prices over the past few months. My point is that the best way to break up the cartel is to let the CCP do its job and fine the sugar mills for their anti-competitive practices. Price fixing by the court may bring the cost of sugar down but it also puts an end to any possibility of competition. The courts would do better to help the CCP by expediting appeals. The cement industries have so far evaded CCP fines by stretching the matter out in court. When they are made to pay billions of rupees in fines they will be less inclined to fix prices in the future. Yesterday's editorial in Dawn said something pretty much to the same effect (http://tinyurl.com/yjmshkd).

As far as the legality of the court's move, I am probably not the right person to comment. But it certainly seems counterintuitive and counterproductive for it to make the Competition Commission enforce a fixed price, which is an essentially anti-competitive price determining mechanism.