Can competition reduce inflation?

Inflation measures changes in an economy's general price level and reflects the phenomenon that nominal currency tends to lose its value over time. It is generally measured in terms of the year-on-year changes in the average level of prices across an economy.

The persistent increase in the general price level of goods and services over a period poses a significant challenge to economic stability and growth. For developing countries like Bangladesh, inflation adversely affects purchasing power, income distribution, and economic confidence. 

There is ongoing discussion in the country regarding double-digit inflation and the monetary policy pursued by the Bangladesh Bank, with criticism directed at the government for relying solely on contractionary monetary policy to curb inflation. Monetary policy and, to a lesser extent, fiscal policy are usually considered the main policy levers for controlling inflation.

Experts have identified that inflation in Bangladesh is driven by both demand-pull and cost-push factors. Supply chain disruptions, caused by fluctuations in supply due to weather events, global market volatility, or domestic logistical issues, are a major factor. Market manipulation, including artificial shortages and price hikes caused by cartels and collusion among market players, further exacerbates the problem. 

Additionally, the country's reliance on imports for essential commodities exposes the economy to exchange rate volatility and global price surges. Structural challenges, such as weak infrastructure and inefficiencies in distribution channels, further contribute to inflationary pressures.

In recent years, global crises, including the Covid-19 pandemic and geopolitical tensions, have exacerbated inflationary pressures, highlighting the need for robust domestic policies. A reduction in competition across many markets in an economy generally leads to higher prices. There is no denying that the Bangladeshi market is not fair, as monopolistic, oligopolistic, and cartel-like activities are prevalent.

Not only do consumers suffer, but businesses are also victims of market inconsistencies. For example, approximately 80% of mills in Kushtia have gone bankrupt due to uneven competition with oligarchs who possess significant capital, creating opportunities for possible cartelisation or syndication in lucrative markets.

Experts have also emphasised the importance of value chains and defended the role of middlemen as supply chain service providers, attributing price issues to extortion rather than their involvement. The Competition Commission may take measures to reduce the number of intermediaries through supply chain reform and restructuring.

The role of a regulatory authority such as the Bangladesh Competition Commission (BCC) is increasingly being recognised for its ability to foster competitive markets and deter anti-competitive activities. The BCC is mandated to promote fair competition, prevent anti-competitive agreements, and curb the abuse of dominant market positions. It also regulates mergers and acquisitions that could potentially harm competition.

By safeguarding market dynamics, the BCC contributes to ensuring equitable access to goods and services while preventing artificial inflation caused by monopolistic or oligopolistic behaviour. There is no true open-market economy in Bangladesh; rather, an oligopolistic structure dominates.

The BCC can play a pivotal role in curbing inflation through several measures. Preventing collusion and cartels is crucial, as collusion among producers, wholesalers, or retailers can artificially inflate prices. The BCC must actively investigate and penalise anti-competitive agreements while encouraging whistleblowing and strengthening evidence-gathering mechanisms.

Regulating the abuse of dominance is also essential, as firms with dominant market positions may exploit their power to dictate prices. The BCC should monitor dominant players in critical sectors such as food, energy, and transportation and enforce penalties for exploitative pricing practices.

Promoting market entry is another important step, as entry barriers deter competition and allow existing players to inflate prices. The BCC can advocate for policies that reduce regulatory and infrastructural barriers while encouraging the participation of small and medium enterprises (SMEs). 

Raising consumer awareness is also necessary, as educating consumers about their rights can prevent exploitation. The BCC should launch awareness campaigns about unfair trade practices and provide platforms for consumers to report grievances.

A coordinated approach is required for inflation control. The BCC must collaborate with the Bangladesh Bank to monitor financial market dynamics, the Ministry of Commerce to ensure smooth supply chain operations, and law enforcement agencies to prevent hoarding and black-market activities. 

Regular market studies and price monitoring can help identify patterns of manipulation. The BCC should develop a comprehensive database of market trends and utilise advanced analytics to detect anomalies in pricing behaviour.

Despite its potential, the BCC faces several challenges in effectively addressing inflation. Limited resources, including insufficient funding and a shortage of trained personnel, hinder its investigative capacity. A lack of public awareness remains a significant issue, as many businesses and consumers are unaware of competition laws. Additionally, resistance from powerful stakeholders, such as influential market players, often obstructs regulatory interventions.

The government rightly identifies supply chain inefficiencies as a key factor behind rising costs, particularly for staples such as rice, onions, and potatoes. However, it has yet to address the deep-rooted supply chain bottlenecks that continue to drive up prices for essential goods. 

A recent seminar raised critical points regarding inflation and the rising prices of agricultural products, emphasising the need for an integrated food value chain and permanent supply chain setups. A chief executive of one of the supply chain shops noted that while the prices of paddy have risen by 34%, rice prices have increased by only 22%.

Experts suggest that formalisation and digitalisation are essential, yet Bangladesh lags behind Sri Lanka, where 43% of the market is digitalised, and Thailand, where the figure is 64%. In contrast, Bangladesh has achieved only 2% digitalisation. 

The country urgently needs IT-based market management for locally produced goods such as rice and potatoes, as well as import-dependent essentials like sugar and edible oil. Products such as onions, which are both locally produced and imported, also require improved digital oversight.

The BCC should prioritise dismantling bottlenecks within agricultural and consumer goods markets, where intermediaries exert significant influence. Promoting direct sales from producers to consumers through avenues such as farmers' markets and digital platforms can help reduce reliance on middlemen. However, successfully implementing these reforms will necessitate long-term structural adjustments.

To enhance the BCC's effectiveness in curbing inflation, several measures are recommended. Capacity building must be prioritised through increased funding, training, and technological resources. Legislative reforms should be implemented to streamline judicial processes and ensure the swift resolution of cases. Stakeholder engagement is also necessary, fostering partnerships with industry associations, academia, and civil society. 

Regional cooperation should be strengthened through collaboration with competition authorities in neighbouring countries to address cross-border anti-competitive practices. Moreover, engagement with international organisations such as UNCTAD, the ICN, and the OECD-GFC is essential.

Competition is vital for maintaining a low-inflation environment. However, competition policies may be less effective in periods of extremely high inflation. The Competition Commission should assess how best to play a preventive role while ensuring that inflation is restored to normal levels. Moreover, it must consider how inflation itself may impact competition within the economy.

M S Siddiqui is a former Non-Government Adviser at the Bangladesh Competition Commission and legal economist. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.