Government Initiative to Reform Pricing

EghtesadOnline: With the aim of creating a free and competitive market, the government issued a directive to reform the sale of non-staple goods by allowing producers to avoid printing prices on their products as of Sept. 23.

News ID: ۷۷۹۳۷۷

23 September 2017

"The directive has many proponents and even more opponents, each reflecting on the issue from a different perspective. Yet, all the reasoning for and against the directive published in the Iranian media ever since its inception has only caused more confusion to the public," Mohammad Reza Kalami Bajestan, director general of the Economic Affairs and Commercial Policies Office with the Ministry of Industries, Mining and Trade, told Financial Tribune.

> Poor Dissemination of Information

Former minister of industries, mining and trade, Mohammad Reza Nematzadeh, had proposed the initiative in the last days of his term by including biscuits, confectionary, cakes, snacks, cellulose products and toiletries in the new pricing scheme.

Later, when he handed the baton to Mohammad Shariatmadari, the new minister added conserves, compotes, sauces, pickles, pickled vegetables, jams and honey to the list.

It has been announced that if the scheme is successfully carried out, other items will be gradually added to this list.

At first glance, the high possibility of sellers and intermediaries taking advantage of the new regulation and causing turmoil in the market is causing serious concerns, especially given the government's poor monitoring system. Naturally, large sections of the public strongly oppose it on social messaging networks and popular websites.

> Why Governments Interfere

Kalami said all over the world and based on economic principles for developing a competitive market, supply should exceed demand, economic players must be able to enter different markets freely and government meddling in economic affairs needs to be minimized.

"In some countries, over certain periods and due to special circumstances such as war, sanctions or an imbalance between supply and demand, prices rise. In such conditions and to support consumers, governments adopt different strategies to solve the problem," he said.

"The first and most immediate thing they think of is to increase supply. Yet, this requires investments or rise in imports. These are time-consuming processes. So, to keep things under control, they make use of pricing policies, meaning that they calculate the end price of products, add a specific amount of profit and mandate the producers to sell their products at the price set by them. Consumers must then be informed of the prices set by the government through price tags, media announcements and so on.”

> Government Pricing List Shrinks

Kalami said this is what happened in Iran many years ago (following the Iran-Iraq War and international sanctions over Iran's nuclear program) and many products were included in the government pricing list due to the supply-demand imbalance.

Yet, at the same time, investments were made in the production sector, import regulations were modified and now these policies have borne fruit, meaning that today in many fields supply outstrips demand. Among those are products included in the ministry’s plan.

“Since the fiscal 1995-96, the government's pricing list has become smaller and producers have been allowed to set competitive prices based on the market forces. Yet, over all these years, a blatant violation has been going on and many factories still print high prices on their product and the clueless customers who trust the government pricing system believe that these are set by the government,” the official said.

> Deceptive Practice

But the truth is that a conspiracy has been going on beneath these price tags between sellers and producers in all these years, he added.

Kalami said producers add a fixed amount of profit to their end prices and this is the price at which they sell their products to supermarkets and chain stores.

"But they also print the consumer price on their products, which is the price at which stores can sell them to customers. The difference between the former and latter prices is the sellers’ profit margin," he said.

“What has happened here is that over the years, sellers, pursuing sheer self-interest, have constantly asked producers to print higher prices on products if they want their products to go on their shelves and, not having any other choice, factory owners have complied.”

This is where the new scheme can help, Kalami declared.

"Producers will be relieved of this pressure and customers will know that the prices on goods are the sellers’ doing. As such, prices in different shops will differ, creating options for customers. Now people will compare prices and quality, and can choose where to shop from," he said.

“This will make sellers set more reasonable prices on their products in order to encourage customers to buy from them and keep their businesses running."

> Economic Aptitude

However, critics of the move argue that many sellers are also likely to set higher prices than before on their products and in the absence of a monitoring system, consumers will be the losers in this scheme.

Kalami counters by stressing that the natural course of events based on economic principles will guide the market to a balance.

"This has already been experienced elsewhere in the world and there is no reason why it shouldn’t have the same results here in Iran,” he said.

Accordingly, when the prices were the same and fixed in all supermarkets and chain stores, the only determining factor for customers was the proximity of the store to their homes, because it made no difference where they purchased their needs from.

Now, customers will look at their pockets before making a purchase because they have a choice.

Based on what the official says, it could be concluded that profiteering shopkeepers as well as middlemen will either be left out of the loop or forced to change their ways and act according to the market logic in order to keep their customers.

In fact, the scheme's success will depend on the economic aptitude of consumers and sellers. As such, ordinary people themselves will be the monitoring agencies rectifying and curbing any opportunistic practices of the sellers.

In the past several weeks, a great deal of discussions about the pros and cons of the scheme have been held between experts and non-experts in the field.

Some critics say jumping from a government pricing system to one where the supply-demand dynamic determines the prices is too hasty a move. It should be implemented step by step, they say.

The first step must be to delegate the task of setting prices from the government to factories, meaning that producers calculate their production expenses and add a fixed percentage of profit to it. Then if anyone had a complaint as to the prices, they can sue the factory.

"In order to gather the critics’ opinions and select a moderate approach, we have asked the minister of industries to postpone the plan's implementation to October 23 so that more studies could be carried out,” he said.

> Opening Up the Market for Investments

The official further said that many foreign companies are not interested in investing in Iran, arguing that the pricing system is controlled by the government and the market is neither free nor competitive.

“One effective way to attract foreign investments is for the government to minimize its interference in pricing. This means producers, whether Iranian or foreign, should be able to enter the market and offer their products at any price the market has a capacity for," he said.

In such a market, only products with the lowest price and the highest quality can sell and be profitable. The ministry aims to achieve this goal through this scheme.

"We want to turn the Iranian market into a competitive one and send this message to Iranian and foreign producers and investors that the market is opening up to them,” Kalami said.