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Markup regulations debate

6bfc0e307d21a91e8eb17ca151b27980.jpgIf for the past year you were living in Vilnius and buying milk, you should have noticed a significant increase in its price. According to the Competition Council of the Republic of Lithuania, a year ago one litre of 2.5% thickness milk cost 1.96Lt and today its price has increased to 2.57Lt. The difference is 0.61Lt or over 30%.

Prices of other food products of essential importance have also gone up. The consequences have been quite painful to ordinary Lithuanians who spend most of their salary on public utilities, food and transport. These commodities constitute over 2/3 of the entire consumer basket of a typical Lithuanian shopper.

It is no wonder then, that these rises in food prices have induced discussions about the introduction of markup regulations.

President’s suggestion
In the beginning of October Lithuania’s President Dalia Grybauskaitė threatened the trade networks with markup regulations, if they did not reduce the profit equities (margins?) for food products of essential importance.

“If prices continue to grow so boldly, I will agree a law of price regulation, which is described in the Civil Code, to institute it for 6 months, because I do not see a free-market economy, I see only oligopoly, and until there is such a situation, strict measures will be used legally”, - proposed President D. Grybauskaitė
However, other leading politicians were skeptical about markup regulations. Seimas chairwoman Irena Degutienė said that these regulations would interfere with the conditions of a free-market economy. She suggested that Lithuania should find other solutions to limit the monopoly of large trade networks.

Premier Andrius Kubilius stated that he does not see how such regulations would be implemented.

Changing the law
After the debate on markup regulations went public, Seimas member Saulius Stoma proposed a project to revise the Prices law. He thinks that traders should show their markups publicly. In his opinion, this would lower the prices.

However, Žilvinas Šilėnas of Lithuania’s free-market institute thinks otherwise. He claims that S. Stoma’s suggestion would not have any significance, if not increase the prices. “Revealing the markups would have the same effect as increasing the font of prices on products – buyers can see them, but it does not change anything”, - says Ž. Šilėnas.

Lithuania’s free-market institute expert thinks that politicians are showing great interest in this subject only because of forthcoming municipal elections. “Prices were increasing for the past 16 years, every autumn we can see a slight rise. This autumn is special only because soon there will be elections”, - says Ž. Šilėnas.

Increasing prices – subjective or objective?
Many Lithuanians believe that the price rise of food products is a consequence of cartel agreements between the leading trade networks. Some politicians think similarly. For example, Member of the European Parliament, Vytautas Landsbergis says: “The free-market, as people describe it, is a market controlled by four large networks, especially in food trading, and they do not have any problem making adjustments in prices at the same time”.

However, increasing prices might be a result of economic processes. Lithuania’s free-market institute’s vice-president Giedrius Kadziauskas thinks that the prices are increasing because of growing demand: “You can ask how can there be a growing demand if consumers are counting reduced incomes. This can be explained by economic law which states that while income is contracting, consumers tend to buy only the essential products”. Because luxury items are not being bought, traders are trying to make a profit by increasing markups on essential products.

Razzle-dazzle has an end
For the whole past month markup regulations were all over the media. Interviews, discussions, various speculations flooded the public space. And it is not over yet.

The Competition Council is doing an investigation on the price formation in trade networks and possible cartel agreements between them; and will publish its findings in the near future.

This data will be essential for S. Stoma’s revision of the Prices law, which will be discussed in Seimas.

Lithuania’s best hope is that the municipal elections will not intervene with the making of sensible decisions by politicians.

As the 46th article of Lithuania’s Constitution states: “Lithuania’s economy shall be based on the right of private ownership, freedom of individual economic activity and initiative. The State shall support economic efforts and initiatives that are useful to society. The State shall regulate economic activity so that it serves the general welfare of the Nation. The law shall prohibit monopolization of production and the market and shall protect freedom of fair competition. The State shall defend the interests of the consumer”.

EBN Reporter Edgaras Savickas