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TYPES OF PRICE CONTROL

TYPES OF PRICE CONTROL
June 19
10:00 2017

As alluded to last week, price control is employed by government to ensure that goods and services are sold at a ‘fair’ price.

There are two common types of price control in existence since the biblical days.

 They are commonly referred to as:

Price ceiling

Price Floors

 

In Fiji, price control is administered by the Fijian Commerce Commission (‘Commission’) under the Commerce Commission Act 2010 (CCA2010) since 1st July, 2010.

 

Price Ceiling

A price ceiling is the setting of a maximum price on a particular goods or service a seller is allowed to charge.

This maximum price is normally set by a state regulator in charge of price control and is commonly imposed when demand is high and supply is low.

The intention of setting such maximum prices is to prevent exploitation of consumers through price ‘gouging’.

Normally the price set is below the equilibrium price or the normal trade price without price control.

Price ceiling is quite common in areas where the demand for goods and services are high and the supply low.

There are two ways of setting maximum prices of controlled goods and services.

The first one is to restrict the profit ‘mark-up’ that a trader can apply onto the into-store cost of controlled goods and services.

This manner of price control allows traders to recover cost using a standard formula for pricing.

In such circumstance, traders do compete in controlling cost in order to gain advantage from the competitiveness of their prices.

The one that is able to control cost better has a competitive advantage over their counter-parts. In Fiji, the Commission uses this manner of price control on vehicle parts and accessories, stationary, certain food items such as canned fish & meat, imported rice, salt, margarine,tea etc.

The second manner of setting maximum prices is to fix and declare the price on each type of goods or services or for classes of goods or services that a trader can charge.

This mode of pricing allows the regulator to set the price for different locations within their jurisdictions and there is little room to compete in such an environment.

In Fiji currently, the Commerce fixes the maximum wholesale and retail prices of flour, biscuit, petroleum price, bread, butter –etc.

 

Price Floor

A price floor is the lowest legal price a commodity can be sold at in a regulated market.

Price floors are common in circumstances where there are surpluses of goods and services.

This manner of price control is mostly employed by governments in the setting of a national minimum wage to prevent underpayment of labour and in agriculture to protect farmers from incurring losses.

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