Consumer sovereignty in the framework of social justice, economic equality and environmental balance, within and across borders

Plausibility of a price ceiling

March 29, 2014

Milk price stabilization seems initially to be more forceful this time with a proposal to impose a price ceiling applicable to dairy products for children under six. Is such a price cap legitimate and workable?

In line with the Price Law, price ceiling is a form of price setting by the State. Price administering agencies need to examine whether milk is a product in a position of monopoly or oligopoly before making any decision thereon. If it is not the case, setting a price ceiling will infringe the Price Law and the Competition Law.

Reportedly, the price management department of the Ministry of Finance currently does not know the market share of each dairy company. To enforce the price ceiling, it has to first identify the market share of dairy producers, especially the key players in the local market. It is necessary to clarify whether such companies are holding a market dominant position or not. This task should be too complicated, as one just needs to contact the business licensing agency and tax authorities to gather the needed data.

To impose a price ceiling, there are two methods prescribed in Circular 25/2014/TT-BTC dated February 17, 2014 by the Ministry of Finance. However, it isn’t so simple as it seems because there is a wide range of dairy products, which is unlike the fuel market where only a few categories are taken into account. Some 500 dairy product categories of 200 enterprises now available will make it a painstaking effort. As a result, identifying which products need a price ceiling is a wise thing to do.

The majority of powered milk products on the market are infant formulas, which are a special kind of dairy products whose formulas vary among manufacturers. Most dairy multinationals have their own products for each market, including specific products for Vietnamese consumers. Therefore, even when they share the same name, it is hard to find products of the same level (the same quality and ingredients, etc.) against which prices can be compared.

When the nutrient contents are mixed, it is required to conduct a clinical test, whose cost is kept secret by all dairy manufacturers, making it difficult to determine which price ceiling is appropriate. Moreover, given the fact that children, when getting used to particular kind of milk, stick to it, there is a market supply “pressure” that producers and importers exert on consumers. Moreover, if a price ceiling was so unreasonable that dairy companies cannot earn enough to cover costs and gain satisfactory profits, they would no longer compete with each other in launching new products. Or perhaps, they would stop producing certain items, then the market segment of children would suffer under supply. Despite so many difficulties, it is still possible to determine a reasonable price ceiling.

However, as reported by the media, the head of the price management unit of the Ministry of Finance said the dairy market of Vietnam is highly competitive. If this statement is true, then a price ceiling imposition is inadequate. For a competitive market, prices must be decided by the market, or more specifically, decided by buyers and sellers. When there are price fluctuations, the Government should only use indirect management measures – for instance, financial and monetary tools or trade policies – to regulate supply and demand for market stabilization.

(By Prof. Ngo Tri Long)