COVID-19

This blog is part of a series of PSDI posts considering the impacts of COVID-19 on competition and consumer protection. See also “Consumer Protection in Pacific Countries in the Wake of COVID-19” and "Competition in the Wake of Covid-19: Supporting Pacific MSMEs."

The coronavirus disease 2019 (COVID-19) pandemic is affecting countries throughout the Pacific region, bringing a range of direct and indirect consequences for public health, public finance, economic welfare, business viability and many other aspects of life. In this blog, PSDI considers the effects of COVID-19 on retail prices and suggests appropriate steps to mitigate those effects.

Pressures on supply and demand and elevated prices

Highly disruptive events such as pandemics and natural disasters are sometimes followed by dramatic increases in prices, including for building materials and staple foods, and shortages of such goods. Price rises do not invariably follow disasters, however. Some traders will regard their support for post-disaster reconstruction as a social obligation. Earning excess profits from customers in such a period might be unacceptable, and detrimental to their business in the long run.

Where prices are increased following a disaster or in a pandemic, consumers—already under financial stress—might perceive that as “profiteering” and call for the introduction of price controls, which governments and regulators might be tempted to introduce. Governments’ concern in these situations is that many consumers may suffer, and a few businesses profit greatly, from charging “unfairly” high prices at a time when consumers do not have the freedom to choose among suppliers or to choose not to buy. In this setting, consumer protection and competition law play a vital role.

Price control is difficult

Prices have been controlled by various means in the past, but most countries now reject price control as having too many adverse side-effects. It is also costly to implement properly.

The first difficulty in price control is determining whether a price increase really is unjustified. A price that is higher than normal might merely reflect increases in the seller’s costs.

The second difficulty is in setting a price at a level that is “fair” during the post-disaster period. A price that is too low is likely to lead to shortages.

A third difficulty is that controlling prices during a period of reduced supply removes the incentive for suppliers to carry extra stock in case of disasters—a builders’ yard, for example, might not invest in extra stock of roofing iron if it can’t charge a premium after a cyclone.

A fourth difficulty is in dealing with the “rationing” problems that follow from controlling prices. If traders are obliged to charge a price that is lower than what market conditions would allow, more people will want to buy the good, demand will exceed supply, and consumers who would have been willing to pay a higher price are likely to miss out altogether.

Price controls are a radical intervention in the market process. They should be regarded as an instrument of last resort and only deployed in a limited way, if at all. Most Pacific islands countries have been reducing or eradicating price control over the past decade, but the powers still exist in some countries’ legislation.

Anti-gouging rules

One response to increasing prices is to temporarily regulate “price gouging” behaviour by traders. In the USA, for example, some states enacted anti-price gouging laws following Hurricane Katrina in 2005. Such laws limit price increases—for example, within a 10% band—during a declared state of emergency.

There is little agreement, however, on what amounts to “price gouging”. Traders are likely to face higher than normal costs during an emergency. If they cannot recover their higher costs through higher prices, they can be expected not to supply the market at all. Any anti-gouging rule must therefore be triggered only where there is economic evidence to show an unreasonable increase not simply in the retail price but in the profit margin for the commodity concerned.

Any anti-gouging rule should apply only for a limited period, such as while a declaration of emergency is in effect or for a fixed term thereafter and should be limited to the particular commodity and geographic area that is affected by excessively high pricing.

Interfering with the market process for setting prices remains inherently risky. Direct controls on prices are very prone to reduce sector productivity, cause inefficient distribution of resources, and ultimately undermine the competitiveness of markets.

Publicity

An alternative response is to encourage consumers to draw attention to cases of radical price increases. In New Zealand, for example, a government “pricewatch” website allows consumers to report price increases (see: https://pricewatch.consumerprotection.govt.nz). This can assist authorities to investigate whether the increase infringes any limit. Increased pricing transparency may discipline traders (who are attentive to the effects of publicity) from unreasonably increasing their prices. Such mechanisms can be established quickly and cheaply and do not bring the risk of lasting adverse economic effects.

Misleading conduct

Some Pacific islands countries already have laws against “misleading or deceptive conduct,” or the equivalent. Where such a law is in force, it should apply to pricing behaviour as well as to other conduct in trade generally. 

Such a rule should be enforced to prevent traders from deliberately or unwittingly misleading consumers regarding the prices of products or services they offer, including the availability of any discount, the imposition of any surcharge or premium, or the reasons for a price being set at the level that it is. Consumers might be misled by a false explanation for a price increase, for example, an untrue claim that “I’ve had to increase the price 100 percent because my supplier doubled the cost.” Traders could inadvertently mislead customers if advertising that was accurate before the outbreak became inaccurate: for example, “25% off all remaining stock” would become misleading if the trader had cancelled that discount.

Enforcement agencies should be vigilant in prosecuting deliberate infringements, and consumer rights bodies active in explaining consumers’ rights, using examples relevant to the pandemic.

Sector regulators and advisors to retail-level businesses should also encourage traders to ensure that their advertising and statements to consumers regarding pricing are accurate and can be substantiated.

Conclusion

An effective consumer protection law, vigilant enforcement by the responsible agency, and active awareness-raising efforts by the relevant ministry or consumer rights body will all help manage the impact of post-pandemic or disaster-related price increases.

This blog post was prepared by Dr. Andrew Simpson, Dr. Alma Pekmezovic, and Mr. Terry Reid, members of PSDI's Competition and Consumer Protection team. PSDI has undertaken competition and consumer protection reform in Cook Islands, Fiji, Kiribati, PNG, Samoa, Solomon Islands, Tonga, and Vanuatu.