Following the bread price-fixing scandal at the end of last year and the further recent increases by the large bread producers, there have been several calls for government to intervene in the market for bread.
The argument against government intervention is that it distorts the market allocation of goods and services. When a good is in short supply, buyers bid up the price. Because suppliers now get a higher price for their goods they allocate more resources to its manufacture, thereby increasing its supply and bringing its price back down again to the equilibrium level.
Thus when prices are kept artificially low, suppliers will allocate fewer resources to the production of the good, leading to shortages. Moreover, if producers were making super-profits in bread production, consumers could simply vote with their feet and force the bread companies to lower their prices to win back customers.
The problem with this argument is that when it comes to a staple good like bread, consumers have no choice but to pay higher prices, whatever they are. Consumer demand is, therefore, price insensitive or price inelastic and bread producers could increase prices without suffering the reduction in demand that would usually go with price hikes.
The Competition Commission found that there was evidence of collusion and price fixing in the bread-producing industry. Last week the commission expressed outrage at the fact that the bread prices of the large producers are going up again, all at the same time, accusing the bread producers of continuing anti-competitive behaviour that allows them to make abnormal profits at the expense of the consumer.
“This blatant profiteering is an insult to the nation, particularly the poor. It demonstrates that the collusion is continuing or the cartel members are acting to maintain the artificially high margins they achieved by acting unlawfully,” said Competition Commissioner Shan Ramburuth.
Artificially high margins can only be maintained in a free-market economy if there are barriers to entry through collusion or other anti-competitive practices that prevent others from entering the market.
Consumers have little or no power to vote with their feet because bread is a staple good, and therefore the nature of the industry lends itself to monopolistic behaviour.
There are several cases in the free market developed economies, such as Europe and the United States, that have set precedents for government and government agencies to intervene in markets that are subject to such conditions.
In the US and the European Union, the case against Microsoft is just one well-known example. There are thousands of others across all industries with which consumers engage. Thus, the case for government intervention in this market is not such a crazy left-wing one at all — in this case, it is imperative for the smooth functioning of a competitive, free-market system.