Commentary: The price isn’t right when there’s unjust profiteering

SINGAPORE: The primary goal of any business is to turn a profit. Recent months, however, have seen a wave of price hikes across various sectors, from bus and train rides and taxi fares to utilities, postage rates and hawker food, sparking questions about the fine line between legitimate business decisions and profiteering.

In September, Finance Minister and Deputy Prime Minister Lawrence Wong acknowledged the concerns, assuring the public that the government is monitoring businesses to prevent them from using rising costs as an excuse to increase prices more than necessary.

This raises a question: How do we discern between justifiable price hikes and exploitative profiteering?

WHAT’S FAIR WHEN IT COMES TO PRICE HIKES?

In a dynamic market, price fluctuations are inevitable. Businesses face a constant struggle between rising costs of raw materials, labour and operational expenses, and the need to maintain profitability. When these costs increase, businesses may be forced to raise their prices to remain viable. This can be considered a legitimate price hike, as it reflects the true cost of doing business.

However, the situation becomes murkier when businesses raise prices beyond what is necessary to cover their increased costs. This is where profiteering comes into play, when businesses exploit a situation, such as a shortage of goods or services, to significantly increase prices and maximise profits at the expense of consumers.

This was brought up by Christine Lagarde, the president of the European Central Bank, who in June said that corporate profits were mostly to blame for driving up inflation last year.

Similarly, a report by think tank Institute for Public Policy Research earlier this month found that “excess profits” by some companies in the UK not only passed inflation on but further amplified it.

Anti-profiteering laws, while crucial for protecting consumers, face several challenges in practice. 

What constitutes profiteering may be too vague, making it difficult to distinguish legitimate price increases from unfair exploitation. A possible solution is to clearly define “unreasonable price increase” in legislation, considering factors such as percentage increase exceeding a specific threshold (for example, 20 per cent within a short timeframe), disproportionate price hikes compared to cost increases, and significant deviation from average industry profit margins.

Second, establishing a business’ true cost structure and profit margin can be difficult, hindering effective enforcement. A possible solution is to implement mandatory cost reporting requirements for specific industries or businesses exceeding certain market share thresholds. For example, the UK requires businesses to provide the Competition and Markets Authority (CMA) with cost information relevant to their investigation of potential anti-competitive practices.

Third, stringent anti-profiteering regulations can discourage businesses, potentially hindering economic growth and innovation. A possible solution is to implement a tiered approach, focusing on essential goods and services while allowing for more flexibility in non-essential sectors.

Fourth, regulations could be implemented requiring companies to set and achieve specific social impact goals, such as providing affordable goods and services, in addition to financial goals. This would incentivise companies to prioritise social benefits over maximising profits. Tax breaks or other incentives could be offered to companies that demonstrably prioritise social impact and lower prices. This would financially reward companies that align with public interest goals.

In Singapore, the Consumer Protection (Fair Trading) Act 2003 (CPFTA) prohibits a range of unfair trade practices, including misleading pricing and price gouging. Businesses found violating the CPFTA can face significant penalties.

The Competition and Consumer Commission of Singapore (CCCS) investigates and enforces competition laws to prevent anti-competitive conduct and ensure fair pricing in the market. The CCCS has issued the Guidelines on Price Transparency for businesses to promote transparency in their pricing practices.

It might be worth considering if the CPFTA could be amended to introduce the definition of profiteering to include factors beyond misleading pricing, such as unreasonable price hikes exceeding a specific threshold and sudden and substantial profit increases.

The CCCS could be empowered to directly investigate and prosecute cases of profiteering, not just anti-competitive conduct. This would allow for a more comprehensive and targeted approach. A system could be established for government agencies to monitor prices in key sectors, especially those providing essential goods and services, to identify and address potential profiteering practices.

WHAT HAPPENS WHEN GST GOES UP IN 2024?

From next year, the Goods and Services Tax (GST) will increase by another 1 percentage point to 9 per cent, intensifying concerns among residents about the cost of living and more price hikes.

The Committee Against Profiteering (CAP) handles GST anti-profiteering complaints, investigating unjustified price increases using the GST hike as a pretext.

Accurately assessing businesses’ cost structures and profit margins requires access to sensitive financial information, which may be challenging to obtain. Increasing fines and introducing other penalties, such as temporary business closures, could act as a stronger deterrent.

Currently, the CAP primarily relies on receiving complaints about unjustified increases from consumers. Presumably, granting the CAP the power to initiate investigations and prosecute businesses suspected of profiteering would allow for proactive enforcement.

For essential goods and services, economists such as Isabella Weber have suggested implementing strategic price controls to prevent excessive price hikes during periods of crisis or market instability.

However, a survey from the Chicago Booth School of Business in January 2022 observed that implementing measures to lower prices can lead to inefficient allocation of goods and services.

It may also have unintended consequences, such as creating black markets or leading to shortages, because the supplier may hold on to the inventory until price controls are over. Furthermore, price control is just a temporary measure and once the control is lifted, prices will continue to soar because of the pent-up demand.

Hence, striking the right balance between encouraging lower prices and ensuring a healthy and competitive business environment is crucial.

Ben Chester Cheong is a Lecturer of Law at the Singapore University of Social Sciences and an Of Counsel in the Financial Services (Regulatory) practice at RHTLaw Asia.