Consumers allow firms to abuse free market

A recent report showed that while the Reserve Bank’s official measure of annual consumer inflation has steadily dropped to 4.9 percent in July, inflation on key basic food items is soaring above 10 percent a year

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While year-on-year inflation on food and non-alcoholic beverages slowed to 5.3 percent in July, the costs associated with the typical portion sizes of very poor consumers for the five most widely consumed food items in South Africa rose by 11.3 percent year on year. Maize meal, depending on type, went up between 16 percent and 46 percent in urban areas.

This is a big knock to any South African household and to the poorest, who spend between 30 percent and 40 percent of their budget on such items, it is a blow hard enough to leave them hungry.

It is not just the price jump that is unusual, it is the variance across products, retailers, and regions.

The research found, for example, that price hikes in rural areas were at times a rand larger than for the same product in urban areas. Between retailers, price changes for a given product commonly varied by around 8 percent and for white sliced bread it was as large as 20 percent.

Increases in food prices are commonly blamed on increases in oil prices affecting transport and production costs, depreciation of the rand making imports more expensive, and a rise in demand faster than an increase in supply, which causes prices to be bargained up and inflation to lift.

The causes should not discriminate by product (except demand and supply changes unique to certain products) and certainly not by retailer or region.

If input costs go up by 10 percent it stands to reason that food prices will go up by a little less than 10 percent across all retailers in all regions. This has not been the case, however, so these causes are merely a scapegoat to ignore a bigger issue.

The real problem is that the market mechanism that should govern prices has broken down. In a free market, competition should cause consumers to switch from high-priced suppliers to low-priced suppliers until their prices are similar and just high enough above costs to allow a modest profit. This is not happening locally.

In some cases, as has been shown previously in the bread and milk sectors, this may be due to suppliers colluding to keep prices fixed above a certain level and thereby eliminate the competition aspect.

The other influence is that prices are generally sticky downwards; they are quick to jump up when costs increase but suppliers are reluctant to let them slide back down when costs reduce.

However, the biggest culprit is the consumer who allows companies to get away with abusing the market system.

First, they are unprepared to shop around for a better price: no retailer should be able to charge 20 percent more than a competitor for the same product.

Second, consumers refuse to decrease their purchases and take the knock to their quality of life. Instead of just not buying the product and sending a strong signal to the supplier to lower prices, consumers go into debt to afford the good, and then complain about its price later. A company cannot sell what consumers do not buy.

The most powerful force in a market economy is the consumer, yet the South African consumer gives up this power willingly, choosing instead to moan about the government and big business in place of changing their actions.

Pierre Heistein is the convener for UCT’s Applied Economics for Smart Decision-making course.


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