Why Fixing Retail Prices of Commodities Fails to Address Market Issues in Bangladesh

In Bangladesh, government efforts to fix the retail prices of essential commodities often fall short of achieving long-term price stability. Despite the apparent simplicity of setting price caps to make essential goods more affordable, this approach overlooks the intricate economic and structural challenges in the country’s commodity markets. Understanding the underlying factors, from supply chain inefficiencies to regulatory shortcomings, sheds light on why fixing prices is not a sustainable solution for managing the retail price of commodities.

Disruption of Supply and Demand Equilibrium
At the heart of any functioning market is the natural equilibrium between supply and demand. When the government imposes fixed prices below this equilibrium, it distorts the market, often leading to unintended consequences like shortages. In a typical market, prices fluctuate based on availability and consumer demand. By fixing prices artificially low, suppliers may find it unprofitable to produce or distribute certain goods, causing a reduction in supply. Over time, this leads to scarcity, directly countering the policy’s objective of making goods more accessible.

Take the example of chicken and eggs, commodities that face periodic price controls. The cost of producing these goods includes feed, labor, and logistics, all of which are subject to price fluctuations in the global and local markets. When the retail price is fixed too low, producers may cut back on production because they cannot cover their costs, resulting in supply shortages.

Neglect of Production and Transportation Costs
Retail price controls often ignore the full spectrum of costs involved in bringing commodities to market. Producers face costs for raw materials, labor, energy, and transportation. For instance, transporting perishable items, such as fruits, vegetables, or dairy products, requires special handling and rapid distribution to prevent spoilage. The perishability of many commodities exacerbates the challenge, as any delays or inefficiencies can lead to significant losses. When prices are set too low, they frequently do not account for the added costs of managing these perishable items, further discouraging suppliers from maintaining adequate stock or investing in distribution infrastructure.

Moreover, fluctuating global prices for raw materials and fuel can significantly impact local production costs. When the government fixes retail prices, it isolates the domestic market from these global realities, causing a disconnect between production costs and retail prices. Producers, faced with rising input costs, may choose to reduce their output rather than sell at a loss, creating further imbalances in the market.

Challenges of a Multi-Layered Supply Chain
One of the key reasons price controls are ineffective is the complexity of Bangladesh’s multi-layered supply chain. Commodities typically pass through several intermediaries—producers, wholesalers, distributors, and retailers—before reaching the end consumer. Each stage in the supply chain adds its own operational costs, including transportation, storage, and handling fees. Retail price fixing fails to account for these additional costs, which are often borne by intermediaries, leading to market distortions.

For example, consider a commodity like rice, which moves through a complex supply chain involving farmers, millers, wholesalers, and retailers. Fixing the retail price of rice does not address the rising costs incurred at earlier stages of production and distribution. Wholesalers and retailers, squeezed by price caps, may attempt to recover their losses by reducing supply, lowering quality, or resorting to informal markets where prices are not regulated.

Fueling Informal Markets and Black Market Activity
When price controls do not reflect actual market dynamics, they can inadvertently fuel the growth of informal markets. Suppliers and retailers, unable to make a profit under government-set prices, often turn to black markets to sell their goods at rates that better align with the cost of production and demand. This is particularly common for high-demand items like fuel, sugar, and cooking oil, where price caps lead to scarcity in formal markets but abundance in informal ones—albeit at higher prices.

Informal markets not only undermine the government’s price control efforts but also deprive the state of tax revenue and create an uneven playing field for legitimate businesses. Moreover, these markets are typically unregulated, raising concerns about quality and consumer safety, especially when dealing with perishable goods.

Extortion and Unofficial Costs in the Supply Chain
Another critical issue that fixed prices fail to address is the widespread extortion and unofficial fees that exist at various points in the supply chain. Transporters, wholesalers, and market vendors frequently face demands for bribes or protection money, adding to the overall cost of doing business. These unofficial costs, which are particularly high in the case of perishables like fruits and vegetables, are not considered when setting retail prices, making it even more difficult for suppliers to operate profitably within a fixed price framework.

The burden of these hidden costs is eventually passed on to the consumer, either through higher prices in the informal market or through reduced product availability in formal channels. Moreover, because perishables must reach the market quickly, extortion delays can lead to significant spoilage, further limiting supply.

Administrative Overload and Regulatory Inefficiencies
Implementing and enforcing fixed prices for commodities requires a robust regulatory framework and significant administrative oversight. In Bangladesh, monitoring compliance, adjusting prices in response to market conditions, and penalizing violators place an immense burden on government agencies. Ensuring that retailers across the country adhere to fixed prices is a difficult task, particularly in rural areas where oversight is limited. In many cases, local authorities lack the resources to enforce compliance effectively, leading to widespread non-adherence and market manipulation.

Furthermore, fixed prices often become outdated as inflation and global market conditions change. The process of updating these prices involves bureaucratic delays, during which time market conditions can worsen. The inefficiencies in price regulation leave both producers and consumers in a state of uncertainty, undermining the overall effectiveness of the policy.

Disincentivizing Investment and Innovation
Price controls can also discourage investment in sectors critical to commodity production and distribution. When producers and suppliers know they cannot charge prices that reflect their actual costs, they have little incentive to invest in improving efficiency, expanding production capacity, or adopting new technologies. This lack of investment can result in long-term supply constraints, as producers are unable or unwilling to meet growing demand.

For instance, in the poultry industry, price controls on chicken and eggs may disincentivize farmers from expanding their operations or adopting more efficient farming practices, leading to supply shortages. Over time, the lack of investment can stifle innovation and reduce the overall competitiveness of the market, ultimately harming consumers.

Addressing Market Manipulation Through Competition Law
Rather than relying on fixed prices, a more effective approach to controlling commodity prices would be to address market manipulation and anti-competitive practices. The Competition Act of 2012 provides the legal framework to prevent monopolistic behavior and price-fixing syndicates. Strengthening the enforcement of this law, particularly by targeting collusion among suppliers, could help ensure a fairer and more competitive market.

The Competition Commission of Bangladesh (CCB) has the authority to investigate and penalize those who manipulate prices, ensuring that supply and demand are allowed to function freely within a competitive environment. Tackling extortion and price manipulation at various points in the supply chain would lead to more transparent and stable market conditions.

Conclusion
Fixing retail prices of essential commodities in Bangladesh is not a sustainable solution to market challenges. The practice distorts the supply-demand balance, overlooks production costs, and fails to address the complexities of multi-layered supply chains and unofficial extortion. Instead of imposing price controls, the government should focus on strengthening competition law enforcement, reducing inefficiencies in the supply chain, and addressing extortion at various stages. By targeting the root causes of market instability, Bangladesh can foster a more resilient and efficient market for essential commodities.

Abu Nazam M Tanveer Hossain: Public Policy Advocate