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Government-controlled pricing

May 23, 2012 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

A May 7, 2012 article in the Bankgok Post, "The price of ignorance can be high," highlights the folly of government interference in pricing. Why are government's so bad at establishing prices? More importantly, what can we learn from their mistakes?

Fair Pricing

Virtually every government intervention into pricing has claimed fairness as its purpose. The government's perception is that the companies offering the product or service in question are gouging the public i.e. making unreasonably high profits at consumers' expense.

How do they arrive at that conclusion? They calculate what they believe to be the offending companies' costs and add what they believe to be a fair profit margin to establish a fair price. Wow, that's a lot of presumption and supposition isn't it?

Let's take a look at how many and what types of assumptions are really being made.

Assumptions

First, the government assumes that it knows the company's costs or what those costs should be. Implicit in this assumption are two more assumptions:

1. Cost is static; they don't change over time.
2. Costs and a fair margin are representative of value.

Cost is static

Anyone watching the evening news understands the impact abnormal weather has on crop yields and, consequently, the price of our food. Similarly, the cost of gasoline is impacted as seasons change, oil supplies are disrupted (artificially or otherwise) and economic and political news spurs speculation. For a government to think that they can monitor all of these changing conditions and more is sheer lunacy.

Value

Compounding the inane assumption that costs are static is the belief that adding a fair margin to these costs creates fairness. Fairness for whom? This approach completely ignores the fact that their are differing market segments for each and every product or service out there.

I may own a desktop computer, but shun smartphones and iPads while my neighbor would feel under equipped if he didn't have all three. My neighbor's and my differing preferences indicate how much value each of us places on these three items. For a government to think that it can come up with a price that's fair to both of us ignores the fundamental concept of value.

Finally, the government presumes that all suppliers of products are offering the same quality and same levels of service. Indeed, this could become a self-fulfilling prophecy in that government-imposed pricing would force companies' offerings to become commodities thereby eliminating the choices that consumers once enjoyed.

Again, the overriding question "Fair to whom?" In the examples outlined above, who would have been better off for the government's intervention? No one that I can see.

Consumer Dissatisfaction

While I've bashed the government's approach to pricing I haven't dealt with the reason why governments get involved in the first place - the hue and cry of the consuming public about the price it's paying whether for food, gasoline or any product/service it feels it must have.

Interestingly the best (most fair) result is achieved when the dissatisfaction is allowed to grow. Before you begin sizing padded cells on my behalf allow me to share my rationale.

If consumers are beginning to unite in their demands for lower prices and the providers of those products and services aren't answering the call, there's a reason. Either the providers aren't making as much money as consumers thought or they are making boat loads of money, but feel that they're in the driver's seat.

Not so profitable

Those companies that aren't making as much money as the public thinks, or are making significant investments in technology to stay abreast of changing customer demands or are experiencing economic forces outside their control aren't going to lower prices.

It doesn't matter that the buying public doesn't want to pay their prices, these companies don't feel that they can lower prices and remain fiscally sound.

Driver's seat

Companies that are experiencing exceptional profits, but feel that they have a captive audience - passengers in a vehicle - should be listening to their customers cries for help, but they're not. This attitude will cost them dearly. Why?

Regardless of the situation, not so profitable or in the driver's seat, unhappy consumers will search for lower-priced alternatives. Absent the ability to find them, they'll develop and present to the market alternatives which will inevitably have a lower price.

Disruptive technologies are born of burgeoning dissatisfaction with present conditions. As you can see, government attempts to bring fairness to the marketplace actually deprives each and every one of us of alternatives that not only fit our needs, but at a price that reflects the value we're actually receiving.

The next time you hear that your government is planning to step in to stem market inequity, call your congressmen and tell them to keep their hands off your future.

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