Escalating Consumer Prices

How jacking up consumer commodity and service prices affects the most vulnerable

Let us pick up an example among many to explain how consumer prices are effected in a narrow market like that of Mauritius, in which competition doesn’t play the active role it is expected to play to efficiently and rationally align prices of goods and services.

Example

Shoppers would have noticed these days a widespread campaign of “promotion” being carried out in several shopping malls by salespeople of the well-known Nestlé brand of dairy and beverage products. Some weeks back, the price of this brand’s kilo of powdered milk was jacked up unexpectedly to above Rs 200 from around Rs 185 before. Its instant coffee product went up also to close to Rs 300 per 200 grams from below Rs 250 previously. Other less established brands continued to sell their milk powder at below Rs 200 and the same quantity of coffee at Rs 140 or thereabouts. Some of the latter even discounted the prices, as they usually do all through the year.

The Nestlé brand’s move was surprising. One, the rupee’s exchange rate has tamed down for some time recently: it hasn’t depreciated. So, there was no reason from the exchange rate angle to justify the sharp increase in the price. Monetary policy didn’t loosen up again at the last two MPC meetings. Therefore it did not carry the risk of pushing up inflationary consumer demand locally. Two, food prices haven’t been going up generally in the world. The Economist’s commodity price index shows that, globally, the price of food items has actually fallen by 11% during the year to mid-June 2017, with an 0.5% decline recorded even so during this last month.

What then could explain the sudden sharp increase in Nestlé’s prices recently and subsequently, these past days, its promotional sales campaign? Its price increases may have met with consumer resistance. Not minding the brand’s good standing, consumers would have resisted them. That would in turn have brought down sales and reduced the turnover of stocks of these items.

In situations such as this, there is an accompanying risk that consumers shifting over to other less popular brands might switch away for good from the brand’s products altogether, finding it not too difficult to change their taste and preferences. If so, Nestlé would risk losing the ‘market power’ it has acquired over a long period of time. To avert such a risk, it would prefer to ‘scale down’. This is what it has done but not necessarily by bringing down the price to where it was previously: it has offered inducements such as a larger quantity of the products for the same jacked-up price. It hopes to thus retain its brand affiliates, rather than losing them and the market for good.

The mechanics of price manipulation

In a narrow market such as Mauritius where people are at times confronted with certain poor quality new products at lower prices, it is not unusual for established brands (which usually will not sacrifice quality) to keep deriving the premium associated with their names. Bad experiences of consumers after shifting to alternatives (“bon marché coûte cher”) drives back demand to quality reliable suppliers.

It applies not only to common consumer products such as milk and coffee. It also applies across the entire range from home building in the hands of reliable contractors to the purchase of machines and vehicles known for their long-standing reliability. Acquired ‘market power’ did not prevent the producers of Volkswagen cars however from cheating on carbon emissions in vehicles they sold and being found out eventually. It did not prevent Takata, the Japanese international airbag producer, from fixing defective airbags on vehicles responsible for dozens of deaths and now facing bankruptcy charges due to huge recalls. Even Google, accused of abusing ‘market power’ by the EU Commission, is currently facing fines of more than 2 billion dollars.

Marketing agencies flash out the names of renowned brands in a bid to increase sales or to make consumers accept unusual price hikes. They bet on the confidence created by the brand names over a long stretch of time to make consumers accept even unreasonable higher prices. In large markets, competition that would arise in such cases would force even brand owners to limit price increases within reasonable limits. But that doesn’t apply to a small market such as that of Mauritius, especially where prejudice held by some people acts as a brake to the necessary switch-over to cheaper – and possibly even better — alternatives.

Safety Nets

Having realized the weakness of the local market structure, the authorities in Mauritius had in the past established a list of essential common consumer products whose prices would be “controlled”. The aim was to safeguard the purchasing power of the country’s lowest earners. Cumbersome bureaucracy in implementation of the policy, compounded by pressing demands of economic lobbies for Mauritius to go the “free market” way, led to such price controls being either abandoned or minimized. As prices of goods and services get continuously jacked up for almost all and sundry, the safety net for those at the bottom appears to have lost its protective mesh.

In place of price controls, a requirement was placed for traders to visibly post prices of products on sale to properly inform the public. It is not quite clear how this applies to prices of services – such as for different medical services provided in private clinics, lawyers’ fees and bank charges called “fees and commissions”. The latter has remained high or kept increasing over the years: Rs 5.7 billion in 2013-14, Rs 5.5 billion in 2014-15 and Rs 6.5 billion in 2015-16, according to the BoM’s annual report for 2016. In this case as well, it is not evident that buyers of services have the real countervailing power to resist exorbitant charges from service providers in a market like that of Mauritius.

What’s the way out?

The final effect of unjustified price increases is to push the less well-off members of the population to seek remedy from public services. It explains, for example, why so many people from the middle and lower rungs of the economic ladder go to our public health services, which are free. It explains also why the government’s welfare budget goes on increasing from year to year, putting pressure on government finances. In itself, it is not bad for the state to stand up for victims of ‘market dominance’, in which a few dictate ever higher cost of living on the population. The state was set up for this redistributive role, in fact.

One must recall however where it all starts: excessive price increases and/or low wages. It involves a wild goose chase, in effect.

The other way out is therefore to guarantee “minimum wages” for all those who cannot afford to meet ever increasing domestic bills due to rising price inflation. A socialist state has responsibility to protect its most vulnerable members. While so doing, it is also necessary for it not to permit undue erosion of the purchasing power of people where a few exert excessive ‘market power’ to keep raising prices artificially.

Anil Gujadhur        

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