If we restrict the supply, can we reduce the prices? From the perspective of economics, it should be the opposite. So, does limiting the number of bakeries and requiring permits for bread sales reduce bread prices?
After the New Year, bread prices increased in some cities, sparking debates about whether this is a “price hike” or simply an “adjustment.” A few days ago, the Minister invited those responsible for bread prices to take action and explained the cost of bread as 61 kuruş in detail(1).
On the other hand, the President of the Turkish Bakers Federation stated that bread prices vary by province and district. When considering operating expenses, producing bread for 61 kuruş is impossible. He also stated that in some provinces, the price of bread had decreased to 60 kuruş due to “unfair” competition but then reverted back to 90 kuruş after their intervention; thus, this should not be interpreted as a 50% increase in bread prices! (2).
The President of another federation, the Turkish Bread Producers Federation, also stated that they had the authority to set bread prices in Turkey and emphasized that bread cannot be sold below these prices. He emphasized that they had no intention of raising prices, but bakers could break even and profit if they sold the bread at the prices fixed by the Federation rather than engaging in unfair competition. Thus, they were working to prevent unfair competition (3).
We also remember that the Competition Authority conducted a series of investigations on these chambers and federations and publicly denounced such practices with an open letter (4). In that letter, which is still published online on the Istanbul Bakers’ Chamber’s website, it is stated that actions aiming to apply the minimum retail price uniformly were deemed illegal (5).
However, in 2014, we also see that “as per the decision taken by the Court of Cassation, significant penalties and sanctions, including substantial compensation and license cancellation, will be applied to bakeries that are selling the bread below the prices set for that province.“(6).
Following the involvement of a ministry, an administrative authority, two federations, and a court at different stages and in different ways, the Minister questioned the prices as follows: “If one municipality sells 250 grams of bread for 62.5 kuruş, and another sells it for 75 kuruş, and prices are like this in the market, why are the private bakeries selling bread for 1 lira or 1 lira 25 kuruş?” (7).
According to another newspaper report dated the same day, the Ministry would (a) request municipalities that grant many permits to make it more difficult to issue permits, (b) take measures to encourage the merging of the existing bakeries, (c) limit the number of bakeries to one for every 15,000 people, and (d) introduce a permit system for places selling bread, similar to the tobacco & liquor shops (8).
While eagerly awaiting how the Ministry will evaluate these four options, it is worth drawing attention to the following points from the perspective of regulatory impact analysis:
The Desired Objective:
Preventing an increase in bread prices and even lowering prices.
Assumptions and Demands of the Parties:
- According to the Ministry, bread prices are high because municipalities produce bread for 61 kuruş. Therefore, prices should decrease.
- According to bakers, bread prices are not high; costs are high; profit margins are low, and lower-priced bakeries that do not comply with quality and hygiene standards engage in “underground” production, selling bread at very low prices and causing unfair competition. Therefore, prices are lower than they should be. Thus, there should be a price increase, and no one should sell below the price the chamber sets.
Nasreddin Hoca’s logic shows that everyone is right. The Ministry references municipal bakeries, but arguing that municipal bakeries and private enterprises have the same cost structure, or should have, is not reasonable.
Identifying the Problem/Regulatory Needs Accurately:
I addressed this issue in my 2012 article titled “Abundance, Scale, and Competition” as follows (9):
“… The first of these misconceptions is to automatically consider markets with a large number of players as “competitive and efficient” without subjecting markets with a large number of firms to a separate analysis. The production of bread is an excellent example in this regard. On one end of the scale, we have modern bread factories with the capacity to produce over 200,000 loaves of bread per day. On the other end, we have “neighborhood bakeries” with capacities around 10,000 loaves of bread. Focusing on relatively small-scale “neighborhood bakeries,” we encounter quite common events, which are contrary to the rational behavior condition of economic theory, such as “an apprentice who eventually opens his own bakery nearby after quarreling with his master.” As a result, we come across many bakeries that operate very close to each other and, if they meet the majority of the demand, can push their competitors into bankruptcy. Due to rationality and economies of scale, bakeries prefer to cut their capacity (limit supply) instead of entering price competition. Therefore, a production that a single bakery can handle is distributed among many bakeries, incurring unnecessary costs and fixed expenses. Restricting competition in this way allows consumers to finance inertia. A similar situation is partially valid for intercity bus companies. The inability to take advantage of economies of scale sometimes leads to price wars, so the relevant ministry has found a solution in the “minimum price” practice to prevent exits from the market. In summary, the conclusion to be drawn from this is that abundance does not always mean efficiency and competition; conversely, when other conditions are not taken into account, abundance can be a reason for restricting competition.”
In summary, the fundamental problems here are: (i) individuals opening bakeries not acting rationally, (ii) municipalities not conducting necessary inspections, and (iii) bakeries not achieving economies of scale.
So, will the Ministry’s and the sector’s proposals address these problems?
Assessment of the Measures Proposed:
(a) Making it more difficult for municipalities to issue permits: We can see that individuals opening bakeries are not acting rationally. However, there is no valid reason to assume that the Ministry or municipalities would act more rationally. This proposal may help firms that cannot cover their costs due to the inability to achieve economies of scale. Still, it will also facilitate cartelization and/or make it harder for larger-scale, more competitive rivals to enter the market. Introducing a “new bakery opening privilege” will create opportunities for abuse and corruption, as well, while increasing the value of existing permits, similar to taxi licenses, and become a new cost item, leading to a decrease in overall supply and an increase in bread prices.
(b) Encouraging bakeries to merge and operate more efficiently: Achieving economies of scale is the most reasonable method to do this. How can it be done? The prerequisite for efficient operation is that small-scale firms should exit the market, and the idle capacity of larger firms should be utilized. Since we cannot force bakeries to merge, the state must provide some incentive. (In other words, the government will give incentives/bribes to some firms for exiting the market!) Who and how will provide this incentive? If the government pays the cost of the incentive, then the citizens already financing the current market failure through high prices will now finance idle bakeries through taxes. If we say that we won’t collect taxes from merged bakeries for five years, the citizens will again fund this indirectly.
(c) Regulating so that there is one bakery for every 15,000 people: This recommendation will not guarantee a decrease in bread prices, either. First, the recommendation is practically unfeasible: Will a new bakery not open in a neighboring town just because there are bakeries in nearby towns? What matters more, the number, the scale, or the location? Has it been calculated how this will achieve the optimum scale? Or how it will solve the quality issue? More importantly, why does the relevant federation want a regulation pushing some of its members out of the market? If the permits of existing firms are protected as “acquired rights,” won’t this prevent the entry of more efficient firms into the market? When new entries are restricted or existing firms are forced out of the market, prices should be expected to increase, not decrease, right?
(d) Implementing a permit system similar to monopoly sales locations for places that sell bread: This recommendation’s underlying purpose is to control the entire production chain and prevent smuggling. This is important for high tax-generating products, such as tobacco and liquor, because smuggling can result in significant tax loss for the government. However, there is no such significant risk with bread. Arguing that this is necessary for health is not realistic enough. Issuing a permit to sell bread means that a permit fee needs to be paid, and the municipality and other entities need to conduct permit inspections and deal with many bureaucratic formalities. On the other hand, as long as the bread is sold in standardized packaging and conditions, what harm is there in selling bread at the grocery store, at the nut shop, mom-and-pop shop, or even at the butcher? If the municipality finds non-compliance during its inspection, it can impose a penalty. However, limiting the number of sales points will not benefit the public, and the cost of enforcing such a regulation will reduce the profits of the grocery stores/markets selling bread or increase prices. Worse, the authorities will focus on the licensed shops, so unregistered products will continue to be sold cheaply and under the table. Also, having fewer sales points that factories need to control will make it easier for them to form cartels to raise the prices!
Conclusion:
As mentioned in previous articles, it is essential to carefully analyze the cause-and-effect relationship between the objective and the proposed regulations. The above assessments aim not to create deadlock or pessimism but to invite stakeholders to see the “big picture” and “a few steps ahead” before making regulations.
In the meantime, it’s worth considering the following actions:
- Municipalities should apply the necessary sanctions for small bakeries that cannot maintain standards instead of preventing new entrants. This way, those who produce in compliance with standards will be protected and have the opportunity to take advantage of a larger scale.
- After these strict measures are taken, there is a risk that the remaining companies may attempt to can set prices together, either by coming together or through federations. So, this must be prevented by active enforcement of competition law. Thus, the competitive price at the existing scale will be reached.
- There is no point in limiting the entry of newcomers or the number of bakeries according to a certain arbitrary population. However, municipalities may set higher capacity requirements or other objective criteria, such as location requirements, for the new entrants based on the existing demand and supply in a given region.
- Eliminating the risk of collusion/price fixing may help large-scale firms gain a cost advantage and sell products at lower prices. Firms that cannot gain this advantage will either merge, modernize, or exit the market, and the market will find its balance. Of course, this proposal, like others, should be subject to an impact analysis, considering its social effects, and if it is the most reasonable/unavoidable solution, it should be implemented.
- Considering the Yargıtay decision mentioned earlier, it should be clarified whether applying “maximum prices” in a regulation allows selling below that price. Associations should be prevented from applying the maximum price as a fixed price using this decision as a pretext.
- Until the necessity and inevitability are clearly proven, a regulation requiring sales locations to obtain extra licenses to sell bread must be avoided.
- http://www.tarim.gov.tr/Haber/856/Bakan-Celik-Ekmek-Fiyatlariyla-Ilgili-Sorumlulari-Goreve-Davet-Ediyorum
- http://aa.com.tr/tr/ekonomi/turkiye-firincilar-federasyonu-baskani-balci-ekmek-fiyatlari-illere-ilcelere-gore-degisiklik-arz-etmektedir/514090
- http://www.ensonhaber.com/ekmek-fiyatlarinda-degisiklik-olmayacak-2015-12-06.html
- http://rekabet-hukuku.blogspot.com/2013/02/baskan-ekmek-ureticilerini-uyard.html
- http://istanbulfirincilarodasi.org/firinci-esnafinin-uymasi-gereken-rekabet-kurallari-hakkindaki-duyuru/
- http://www.sabah.com.tr/ekonomi/2014/09/21/1-liranin-altinda-ekmek-satan-firinlar-yandi
- http://www.tarim.gov.tr/Haber/856/Bakan-Celik-Ekmek-Fiyatlariyla-Ilgili-Sorumlulari-Goreve-Davet-Ediyorum
- http://www.haberturk.com/ekonomi/ekonomi/haber/1189596-ekmek-satisi-ruhsata-baglanacak
- https://www.barisekdi.name/hukuk-iktisat/97-cokluk-buyukluk-ve-rekabet.
(*) The views and suggestions presented in this article are entirely personal and not binding on any individual, institution, or organization.
(**) You can access the previous articles on this subject via the following links:
