“Price fixing entails collusive behaviour among competitors. If the reader is not familiar with it, all he has to do is wonder why all the fruit vendors ask for exactly the same price when he goes to market to buy a kilo of apples.”

This is from an otherwise good article on price-fixing by Niaz Morshed (the chess Grand Master) that appeared in September Forum. I’m not sure if I agree with Mr Morshed, and the difference matters greatly for our ability to control inflation.

The story Mr Morshed is telling is this. All apple sellers in the market agree to sell apples at, say, 10 taka a kilo. Presumably at that price, apple sellers are making a profit. Let’s say that the cost of getting a kilo of apple to the market is 5 taka. So, every apple seller is making at least 5 taka per kilo.

Now, suppose there is an apple seller who thinks 3 taka per kilo profit is enough for him. If he lowers his price to 8 taka per kilo, he can get all the apple buyers in this bazaar. So his total profit will perhaps be even higher than what he would make with 10 taka per kilo. Seeing this, let’s say another apple seller lowers her price to 8 taka per kilo. But why should the market stop at 8 taka per kilo? Why wouldn’t another seller lower the price to 7, or 6, or 5 taka? In fact, the price would continue to fall until it just covers the costs. At that point, everyone will sell at 5 taka per kilo.

Now, this story is fundamentally different from the one NM is telling. In his story, the same price by every vendor means collusive behaviour. In my story, the same price by every vendor means competition.

I’d argue that mine is a far simpler story than his. In his story, we need to come up with a reason why the price is fixed at 10 taka – why not higher or lower? How do you decide how much ‘extra profit’ is enough? In my story, price gravitates to 5 taka because that’s how much it costs to bring a kilo of apple to the bazaar.

For his story to hold, and mine to be wrong, there has to be a mechanism through which 10 taka price agreement can be enforced. Maybe the local mastan is in charge of enforcing the price. Saif over at Adda suggested some other mechanisms here.

Do they reflect the realities of the Bangladeshi market place?

In the fruit markets of the west, you also get same price by different vendors. But in the west no one says this is because of price fixing. It’s considered the text book example of markets. Is Bangladesh really different? This is not a rhetorical question. We’d genuinely appreciate your thoughts on this – particularly those of you with experiences in Deshi haats and bazaars.

The answer is important to how inflation can be controlled. So far, of course, the regime’s approach hasn’t worked.

Here is what MA Taslim, an economist, noted in a recent Daily Star op-ed (link).

“First, the government seems to have swallowed hook, line and sinker a highly questionable theory that held syndication and hoarding as mainly responsible for the essential price inflation. The consequent drive against the business community in search of hoarders quickly turned the buoyant business mood into a pessimistic outlook, resulting in a slow-down of business activities.”

Mr Taslim also asks whether the much touted snubbing of the IMF and the announced expansionary monetary stance the Bangladesh Bank is going to adopt is a good idea. I’ve argued earlier that it appears a depreciation of the taka-rupee was possibly a major reason for the initial outbreak of food price inflation. If this diagnosis is correct, then an appreciation of taka against the Indian rupee should help.

But it’s hard to see how the monetary stance the Bank is set to adopt will help in this. In fact, one doesn’t have to be an IMF economist to fear that when inflation is already in the double digits, and when people expect prices to rise even more rapidly in the future, printing more money is only going to fuel inflation.