DTI should let market determine prices

By
The Manila Times
February 12, 2020

A SMALL news item earlier this week revealed that the Department of Trade and Industry (DTI) is
studying whether it should raise the “suggested retail price,” or SRP, of face masks, which have become
scarce because of public concern over the spread of the 2019 novel coronavirus acute respiratory
disease 2019-nCoV ARD). The DTI should instead reassess the entire concept of mandated prices.

The issue of the price of face masks arose because it has become clear that a large volume of them will
have to be imported to meet public demand; the inventories of retailers and distributors here in the
Philippines have been exhausted, and local manufacturers, although capable of producing enough under
normal circumstances, will take some time to catch up. Currently, the DTI’s SRP for face masks is
between P1 and P8. Imported masks sourced from India or elsewhere will cost more, and so the DTI is
considering raising the SRP to reflect that.

By law, the DTI has the authority to establish SRP for virtually any goods sold at retail and can impose
penalties on retailers who are found to be selling goods at prices higher than the SRP. In connection with
the face masks, even though the DTI is reviewing the current price level, the department is preparing
complaints against 18 retailers along Manila’s Bambang Street (an area where medical supplies stores
are concentrated) for overpricing face masks.

It should be pointed out that many medical professionals have clarified that the only real value of the
common surgical face masks that are now in short supply is psychological comfort; they are neither
necessary nor effective in preventing infection by the nCoV virus. That scientific fact casts DTI’s
management of consumer prices in a different and somewhat unfavorable light.

The rationale behind SRP is that basic commodities needed by consumers should be as affordable as
possible. Thus, common items such as milk, bread, rice, noodles, disposable diapers, canned sardines
and so on are assigned an SRP by the DTI.

The intentions are good, but in practice this presents a couple of unavoidable problems. First, the SRP
policy can encourage smuggling; if the SRP is too low from the vendors’ point of view, they will often try
to source cheaper versions of the goods, which are often smuggled. Second, the SRP can lead to even
more severe shortages. If the SRP is too low, and vendors are unable to obtain the product at a lower
price or are unwilling to source it from smugglers, they may simply allow their supplies to run out
entirely.

Third, SRP can encourage growth of a black market, which is what has happened in the case of face
masks. If there is sufficient demand and vendors can still obtain the product, albeit at a higher price,
they can evade the SRP by selling it informally. The drug store or medical supply store may not have face
masks, but consumers can still buy them — at higher prices — from street vendors. Although the
consumer demand is met, there is no oversight of product quality, the price is usually higher, and the
government loses a bit of revenue with each sale because the value-added tax or other applicable taxes
are not paid.
These difficulties are not a result of poor regulation on the DTI’s part, but rather a flawed framework
that tries to be a hybrid between a command economy and a free-market economy, and produces
results that are unsatisfying to either perspective.

A much more effective way to protect consumers from unreasonably high prices yet limit unnatural
interference in the marketplace would be to focus on the supply side of the equation, rather than the
demand side represented by retail prices, and to limit that effort to goods that are legitimately vital to
consumers — which, public sentiment notwithstanding, is a list that does not include surgical face
masks. If the DTI were to reorient its focus in this way, the natural action of the consumer market would
stabilize prices on its own and much of the department’s energy could be redirected to more
substantive activities.