Headline: MoE, MoF sing different tunes: Gulf Today

Quote:

CONSUMER Protection Society expert Hassan Marae Al Kathiri has rejected justifications of the dairy and juice producers' group over hike of prices by 08- 12 per cent.
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Kathiri lauded the attitude taken by the Ministry of Economy against the price-hike, indicating that he supports subsidy of the local industry by the government, indicating that such groups should assist them to solve their problems and remove impediments in their way in order to serve consumer and not to raise prices in unjustified manner.

"Any firm which thinks of price-hike should first contact the competent authorities," he added, indicating that "the consumers and the competent authorities do not accept sudden price-hike and surfacing of lobbying that monopolise some commodities."
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Meanwhile, sources of Ministry of Finance and Industry, considered hike of milk prices as a commercial issue that the ministry has nothing to do with it. But the Ministry of Economy warned about the monopoly alliance to raise products of the dairy companies, indicating "It is a clear violation of the consumer protection law."
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Mohammed Mousa Al Jassim, head of the consumer protection society called for cancelling all the trade agencies which monopolise food items nationwide, adding that the trade agencies bear the names of UAE nationals, but actually wielded by foreigners.

Price ceilings and product quality

A day after saying the UAE Dairy and Juices Association was not involved in the recent decision of producers to hike prices, its general manager is now saying that if the Ministry of the Economy bans the price increases then quality will suffer:

The Ministry of Economy's decision to restrict price increases for diary products will force firms to compromise on quality in order to reduce costs, the Chairman of the UAE Dairy and Juices Association has warned.

Dr Ahmad Al Tijani said the ministry can stabilise prices by subsidising dairy products instead of prohibiting a price increase.

Economic theory tells us that government imposed price ceilings have different effects depending on whether the market is monopolized or competitive.

Consider first the case where quality cannot be varied, only quantity. (Alternatively, think of this as the case where the government monitors quality and sets the price ceiling accordingly.) In this case, an increase in costs will push up the competitive market price. If the government freezes price, then producers will cut production and a shortage arises. Monopoly prices also increase when costs increase. A price freeze, however, will in this case actually cause the monopolist to choose to expand output for a cost increase that is not too large.

If quality can be varied and the government does not monitor quality, then market forces can pretty much undo the effect a price ceiling; this is true whether markets are competitive or monopolized. I say "pretty much undo" because exact undoing can only be achieved when the one "quality" of the product that is not monitored is the size of the package. If size of the package is still monitored then firms respond to price ceilings by changing other characteristics of the product and the effect of the ceiling is not completely undone.

Cartels are one means of monopolizing a market. In a price-fixing cartel members agree on price. The agreed upon price acts like a price floor and creates excess supply. Members of the cartel then compete with each other for sales by increasing quality. In general, consumers view the quality to be too high in the sense that the premium in quality over the competitive level is not justified by the price hike.

The bottomline? If a trade association organizes itself as a cartel, then a cost increase together with a government imposed price freeze will have the following result. The cost increases will cause each of the producers to reduce quantity. Excess supply will shrink or disappear, dissipating the excessive competition in quality. Quality will fall towards the competitive level; that is, a desirable fall in quality.

Dairy and juice firms warned over pricing plans :: Gulf News

Gulf News reports:

Abu Dhabi: The Ministry of Economy yesterday warned major dairy and fruit juice companies that unless they retract their price hike demands they will face tough action. "Legal action will be taken against companies which fail to abide by the current prices in accordance with article 18 of the Federal Consumer Protection Law No 24/2006," a statement issued by the Consumer Protection Department said.

The move came after a number of major dairy and fruit juice companies have demanded price increases of up to 33 per cent from next month. The statement dismissed the monopolistic practices as "harmful to consumers and the national economy" and said monopoly was ensured through lobbying and implicit agreements among dairy and juice products companies.

The statement named six companies, which illegally sought to hike prices: Al Marai Company, Al Ain Dairy Company, Al Rawabi Dairy, Mohamed Abdullah Al Othman Trading Corporation and Gulf Dairy and Safa Company.
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Dr Ahmad Al Tijani, general manager for the Al Rawabi Dairy Company and chairman of the UAE Dairy and Juices Association, said the association did not take a decision to increase the prices. "It was a decision taken by individual companies but not at the association's level," he said.

It is good to see the government intervene in monopolistic practices. While the decision to increase prices was not an association decision, I do have a concern that the individual companies became accustomed to pricing agreements because of their experience in the association.

End the juice and dairy cartel

The UAE Dairy and Juice Association has long used its influence (wasta) to cartelize the market. As a result, prices are higher than they otherwise would be.

At the latest meeting of the cartel they decided to raise prices. The Khaleej Times reports:

ABU DHABI — Prices of canned or fresh juices, milk, yogurt and other dairy products will be hiked by up to 28 per cent this summer.

The new prices will come into effect on April 17 [hmmm - not the summer, but it might feel like it]. A number of dairy companies have started informing supermarkets and groceries about their decision.
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“The cost of production as well as distribution has been rising steadily over the past few years and we tried our best to curb it as much as we could,” said a trader dealing in dairy products, justifying the move. He added that since dairy producers’ objective is to provide high quality products to their customers, they have no option but to increase the prices.

Price increases themselves are not evidence of a cartel because prices will rise in a competitive market when costs of production increase. The evidence that there is a cartel attempting to control prices is the agreement on timing of the increases and on the uniformity of the prices increases for particular products. Yes, in competitive market you'd expect prices to increase at about the same time and for prices to resettle at a new uniform rate, but not in such an orderly fashion and certainly not by prior agreement.

It is another question whether the cartel is successful. As indicated in the link in the opening paragraph above, it has been successful in the past perhaps because its influence with the authorities has enabled it to control entry and discipline signatories to the association's price agreements.

In the last year the association has had difficulty enforcing agreements to increase prices both because individual members of the association did not want to abide by the agreement, and because ministries of the government actively opposed the price increases and/or withdrew their role in enforcing the agreements of the cartel.

It is not clear how the Ministry of the Economy will react to this latest agreement. The ministry rules on price increases in a large number of areas and recently has allowed price increases if it sees costs have increased. The more efficient way of making sure that prices are "justified" is to focus the ministry's efforts on creating competitive markets -- by eliminating government regulations which support cartels, exclusive dealerships and otherwise restrict entry of new firms, and by introducing a competitions policy that makes price agreements illegal.