Price fixing might not be the best option for the UAE

Dubai: This year the UAE fixed prices of 1,650 basic commodities until the end of 2012. This is especially helpful when fluctuating prices coincide with a need for increase in consumption, such as during Ramadan when Arab and Muslim families’ consumption increases by nearly 30 per cent, according to UAE-based economist No’man Ashour.

Standardisation or fixing is introduced to balance price fluctuation among certain commodities. But what are the reasons of fluctuating prices and does price standardisation fare well?

Dr. Cedwyn Fernandes, an economics professor at Middlesex University in Dubai, explains that a number of variables conspire to fluctuate the prices of commodities.

“The UAE imports more than 80 per cent of its food products,” Fernandes said. “As a result the price is driven by international food commodity prices and exchange rates. In February the World Commodity Price Index was at 169.21, and by August it had risen to 185.56, a rise of 9.66 per cent. The UAE has not much control over these prices, which are driven by supply factors such as input costs of fertilizer and fuel, weather conditions and demand for commodities from China and India.“ The pegging of the UAE dirham to the US dollar, which experienced a depreciation of 5.65 per cent since July, acts as another reason of fluctuating prices, Fernandes explained. These factors coupled with the unpredictable fuel prices, which impact transportation costs would affect the prices of commodities.

Price standardization seems to exist for the well-being of the general public, especially in cases where a few suppliers monopolise supplies and create an artificial shortage of goods to increase prices.

Fernandes said: “This is not the case in the UAE. There are numerous competitors and a lot of competition between supermarkets.”

However, the international market value dictates price standardisation, as the government will need to subsidise the difference to suppliers, who are unlikely to supply goods below cost price.

This raises the question of how good is this for the market?

“Price fixing could send a wrong signal to other sectors and may discourage investors,” Fernandes said.

This does not mean authorities should ignore price regulation. Price fixing is for the general good of the public. However, economists advocate that it should focus on regulating prices rather than imposing it.

Fernandes explained that a common price amongst competitors may discourage corporations from seeking innovation, which companies invest in for the sake of product differentiation, thereby attracting a higher price for their products.

He illustrates this: “If mobile phones were standardised to a maximum of Dh1,500, would there ever be an iPhone?”

- The writer is community journalist for Gulf News