Pricing Economics – Regulator Intervention in Price fixation

There has been a couple of headlines in the South Indian Film fraternity in the last few months. You might wonder what it has got to do with Pricing Economics. Let me delve deeper;

1. Karnataka Government passes order to cap movie ticket prices. HC intervenes to alter the order’s remit
2. Almost all theatres in Tamil Nadu were shut for a week from July 1– TN Government has capped movie ticket prices for long & now tops it with a 28% municipal tax to work around GST regime.

A little earlier, there was a lot of attention on Government controlling prices of ‘Heart Stents’

Fuel price regulation / deregulation is always in the news. Recently we have moved towards daily price fixing mechanism.

Another example of Price fixation relates to School fees of private schools. Many State governments have been passing orders over the years capping the fee charged by private schools

Government got a lot of attention for intervening in capping UBER / OLA fares in Bangalore

Why does Regulator Intervene?

In India, Regulator intervention in market dynamics is not new and I think it is part of the DNA & the system.

Taking a step back, Preamble of Indian Constitution after the 42^nd amendment reads “WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN, SOCIALIST, SECULAR, DEMOCRATIC REPUBLIC”

Key to note is the word SOCIALIST, indicating that by design, government will intervene for wider social good. Regulator intervention in price fixation examples cited earlier are all ‘DEEMED’ to be for wider social good.

How the Government achieves this is by empowering the Central & State governments & Regulatory bodies vide different statutes;

Examples:

1. Essential Commodities Act
2. National Pharmaceutical Pricing Authority (NPPA) & National List of Essential Medicines (NLEM)
3. TRAI – Fix tariff ceiling for telecom companies

Is it always one-way traffic?

Regulator intervention in pricing is definitely not a one-way traffic. It can be seen in two folds:

1. Regulator does not intervene with a Price cap alone. On case to case basis, intervention is in the form of Price Floor as well. ‘Minimum support price (MSP)’ for agricultural products is a key example.

Floor price strategy is used many times to temporarily control import to encourage domestic manufacturer. Fixing floor price for steel imports in early 2016 is a good example

2. Interestingly, industry bodies could request government for a floor price. This happens when there is perception that the competitive environment is no longer a level playing field. Recently, top telecom operators are lobbying with TRAI for floor price after Jio’s disruptive entry.

Such a request could also come up when the cost of operations in the industry is going through a tough phase or not in sync with Global scenario. Oil & Gas companies continuously lobby with government for a minimum floor price for Natural Gas

My Point of view

With relatively high levels of illiteracy, multiple layers of middlemen, lack of transparency, high levels of corruption & very poor quality of public welfare facilities offered by government, I think regulator intervention in price fixing is necessary. However, I’m not comfortable with the implementation (not that it is a surprise):

1. Regulator intervention should be only when there is a ‘Real’ wider social good is in play. Right now, State governments have crossed the line and have resorted to ‘Populist measures’. Why intervene when there is no existing problem or one in horizon?. Government has no role to play in fixing movie ticket prices as it is entertainment and not an essential item. Same is the case with intervening with UBER / OLA surge pricing. Market is more than capable of figuring out the right equilibrium price
2. Government is forcing private sector to compensate for state’s inefficiency. If the Government schools provide great quality, why would we go to Private schools? If Government hospitals are of highest standards, why would people go to Private hospitals? Arm-twisting profit motive entities to become pseudo charitable / not for profit entities will be seriously detrimental.

Innovation is a serious victim of this practice and will have severe negative effects in the longer term. If there is no or only very limited scope for profit, would medical companies have the surplus to put back into R&D?

3. Price intervention should be used as ‘Band-aid’ approach and for short term till the root cause is figured out or managed. The ‘Heart Stent’ price cap seems to emerge from exorbitant margin applied by middlemen especially Hospitals before it reaches the consumer. It is not healthy to do moral policing of maximum profit margin any company could earn. If it is a case of essential item, a temporary intervention is good. It should not stay for long. Unfortunately, government is mulling adding more medical equipment to this list, indicating that this is not going to be temporary. Why not have a separate focussed & incentivised stream in ‘Make in India’ for cost effective offerings in NLEM segment?
4. The imposition of price controls on a well-functioning, competitive market harms society by reducing the amount of trade in the economy and creating incentives to waste resources. Price control should be a strategy only when the competitive environment is not developed enough or strong enough. By ‘Surgical / clinical’ pricing intervention by government, fostering a healthy competitive environment should be the focus, rather than killing it.