w/ Armanç Canbeyli, published @Mondaq — 

During the COVID-19 pandemic, the Turkish government established the Unfair Price Assessment Board (“Board”). The Board’s primary aim is to investigate and fine unreasonable price increases and stockpiling practices that distort market conditions during emergencies^[1]. However, two years after the COVID-19 pandemic, the Board is still active and has fined hundreds of firms which are claimed to apply unfair prices. In this short article, first, we will elaborate on the recent activities of the Board and try to explain why such a tool is preferred by the government. Then, we discuss whether the Board is necessary while an active competition authority exists. Finally, we examine the unintended consequences of the Board’s activities on the market economy.

Foundation of the Board and its recent decisions

The Board was founded in the early days of the COVID-19 pandemic by the Regulation on Unfair Price Assessment Board (“Regulation”)^[2] to deal with the supply and demand shocks in markets. The Regulation provides that the Board would operate in cases of emergency, disaster, or economic fluctuation. The application’s scope effectively covers all manufacturers, suppliers, and retail businesses. Accordingly, market players are required to refrain from increasing their prices excessively or unreasonably. They are also prohibited from activities that disrupt the free competition in the market and restrict the consumers’ access to goods by limiting the output.

However, two years after the COVID-19 pandemic the Board has actively monitored the markets and fined hundreds of firms that were claimed to violate the Regulation. In 2023, the Board fined about 700 firms in various sectors, including automotive, greengrocery, FMCG, etc.^[3]. Moreover, the Minister of Trade has constantly warned the firms to avoid any unfair price increases that are not parallel to their cost increases, by emphasizing the stability of the exchange rate and the decline in inflation rate^[4].

The Board’s decisions are not public, and the Regulation does not cite explicitly how an unfair price is defined. However, the general sense of perception implies that the Board evaluates any short-term price increase as unfair pricing unless it is not explained by a corresponding increase in production costs. Even such that a percentage price increase exceeds the percentage cost increase may be evaluated as unfair pricing. This indicates a hard tie between price and cost that limits the profit margin of the firms.

The Board’s anti-inflationary role

Although there is no emergency, the main reason why the Board is so active seems to be the chronic high inflation in the Turkish economy in recent years. During the pandemic, to stimulate the demand and investments the central banks almost all over the world cut the interest rates. Turkey followed the same pattern. However, after the pandemic, due to increasing inflationary pressures, the central banks have begun to increase the interest rates gradually. However, the Turkish government has followed an unorthodox policy by keeping the interest rates low and applying a loose monetary policy to sustain the demand growth in the economy.

As robustly put by the economic theory, inflation is a monetary phenomenon^[5]. And, as one of the fundamental principles of economics suggests “prices rise when the government prints too much money”^[6]. Therefore, after some time the inflation got out of control and the Turkish lira depreciated against the foreign currencies, which triggered another inflationary pressure. The response of the Turkish government was consolidating its unorthodox policy by suppressing the foreign exchange currency and blaming the market players as the scapegoat for increasing prices. From this perspective, the role of the Board may be seen as micromanagement of prices for disinflation.

A complement or a substitute for competition policy

In a modern market economy, if the price of a product is rising because of a conspiracy (e.g. price fixing) or an exploitative behavior (e.g. excessive pricing), this is an antitrust problem. And there are appropriate institutions, such as competition authorities, to deal with these issues. After an investigation, based on well-defined principles, a competition authority can fine the firms and even take some structural measures to overcome the problem. In such an examination, the competition authority rigorously investigates whether a firm or a group of firms increases the prices above competitive levels. Compared to competition authorities’ decisions, the Board’s decisions are quick but archaic responses to price increases. In case of emergencies, a quick response to price hikes may calm panic behaviors. However, it should be kept in mind that it would come with high error costs. 

The Turkish Constitution dated 1982 founded the legal framework of the market economy based on the freedom of contract, the property rights, and the freedom of enterprise. At the same time, Article 167 of the Constitution obliges the government to prevent cartelization and monopolization in the economy. Therefore, the Antitrust Act was enacted in 1994 and the Turkish Competition Authority (“TCA”) was established in 1997 to ensure competition in the markets. Currently, with a quarter century of experience, the TCA is one of the most active authorities in the world. It has been aggressively investigating pricing behaviors – e.g. resale price maintenance, hub-and-spoke cartels, concerted practices, etc. – in various industries during and after the COVID-19 pandemic. if the price of a product is rising because of an antitrust problem, the TCA is the right address, and the antitrust act is the appropriate legal framework. Therefore, the use of the Regulation should be restricted to emergencies only. Thus, the Regulation is neither a substitute nor a complement to a competition policy. In contrast, any misusage would have untended consequences both in the short run and long run.

Unintended consequences of misusage

Price is a signal both for consumers and producers. When the price of a product increases, it informs the economic units that the product is in short supply. It rewards consumers who buy less and producers who produce more. In a modern market economy, these signals ensure the efficient use of resources^[7]. Any suppression of price changes distorts these signals, and the economic units cannot adjust their demand and supply. This is the short-run effect. In the long run, distortion of price signals has more detrimental effects such as lack of investment, miss adjustment of technological change, decrease in the number of firms in the market, and lack of competition. All of those permanently create short supply, causing higher inflation and loss of welfare in the long run.

Above mentioned potential consequences have special importance for Turkey, as an emerging country. Distorting price signals or limiting profit margins may mislead the incentives in the economy leading to a lack of enough foreign investment, slow adjustment of technological change, and enormous social costs due to confining in the middle-income trap. 

The centrally planned economy experience in the second half of the 20th century showed that pricing decisions should be left to the market participants unless there is a permanent market failure. The right price is not an issue of calculation but an outcome of competition. If the aim is disinflation, not the price of the products, but the price of the money itself should be influenced by appropriate macroeconomic policies.

^[1] See, Köksal, E. and Canbeyli, A. (2021). “The Lesser Evil? Assessment Of the Turkish Unfair Pricing Assessment Board”. Available at https://www.mondaq.com/turkey/antitrust-eu-competition-/1043612/the-lesser-evil-assessment-of-the-turkish-unfair-pricing-assessment-board. 

^[2] Official Gazette dated 28 May 2020 and numbered 31138.

^[3] See, News on Republic of Türkiye Ministry of Trade Website. Available at https://ticaret.gov.tr/haberler/tarifeye-aykiri-ekmek-satisi-yapan-isletmelere-9-4-milyon-lira-ceza-kesildi, and https://ticaret.gov.tr/haberler/haksiz-fiyat-degerlendirme-kurulu-yilin-ilk-yarisinda-152-8-milyon-lira-ceza-kesti.

^[4] See, News on Republic of Türkiye Ministry of Trade Website. Available at https://ticaret.gov.tr/haberler/ticaret-bakani-omer-bolat-is-dunyasi-ile-istisare-toplantisinda.

^[5] See, Salin, P. “Inflation, a monetary phenomenon.” The International Monetary System and the Theory of Monetary Systems. Edward Elgar Publishing, 2016. 112-119.

^[6] Mankiw, N. G. Principles of Economics. 3E. Cengage Learning, 2014. 11-12.

^[7] See, Tim Harford’s recent FT column in respose to a question “What if inflation was made illegal? Could we legislate that no prices could ever rise?”. Available at https://www.ft.com/content/d39468ca-fd56-43d0-ab41-43e64d83af10.