Syndicate, rationality and price expectation

An important question to ask is that if there is a significant "syndication" power to influence prices, why don't they collude and set higher prices in "normal time" or all the time?

Inflation is ubiquitous now, largely fuelled by the Russia-Ukraine war and the pent-up demand after easing of the Covid restrictions. The overheated economies along with the high import prices of commodities and gasoline have made the consumption basket dearer in almost all countries in the world.

The burden of the impact has fallen disproportionately on the poorer countries - about 70 per cent of the emerging and developing countries now have inflation higher than 5 per cent as opposed to 44 per cent of the advanced economies. The current inflation in Bangladesh rose to 6.17 per cent in February 2022. Higher demand in Ramadan has added an extra push to the inflation.

Against this backdrop, I will highlight a few issues, which are obvious but less talked about, to understand the price dynamics in uncertain situations. I will also shed some light on the role of the government - what the government can and cannot do to contain prices in such a situation. At the end, I will give an explanation of why we are obsessed with the idea of "syndicate".

When individuals are rational and they respond to some common shocks (e.g. price hike), it may seem as if their reactions are coordinated. It is important to understand that when some responses are rational for the individuals in their own right, people do not need to coordinate with others for the better outcomes. When it rains we all run for shelter or use umbrellas.

It may appear to a Martian that we have coordinated our responses before running. Though it is a very naïve example, it highlights how individual rational responses can be misconstrued as coordinated ones. 

When these seemingly coordinated responses of a segment of population have an adverse impact on the wellbeing of the general people, we tend to blame the coordination and find ill motives behind it.

"Syndicate" is one such villain in our narrative of price movement and we have heard a lot about it in recent episodes of price escalation of some essential food items in Bangladesh.

An important question to ask is that if there is a significant "syndication" power to influence prices, why don't they collude and set higher prices in "normal time" or all the time? Why do such complaints of collusion come up more when we observe higher volatility in global prices? When there is a global price shock, it has significant implications for the behaviour of the local market players and thus for the prices, which can be misunderstood as the behaviour of a cartel or "syndicate". 

In the period of price uncertainty, high inflation impacts peoples' conjecture about the future price and this in turn increases the current inflation.

If the majority of the people think that prices will increase in future, it not only impacts the future prices, it raises current prices too.

That is, today's price contains information about the future. How does it work?

When global inflation looms large, all players in an economy such as consumers, traders, importers, producers etc perceive that prices will rise in future. In such a situation consumers may start over purchasing their supplies today in fear of higher prices tomorrow.

This will surely create demand pressure in the market and price will rise. The traders think that if they sell their goods tomorrow when the prices will be higher, instead of today, they can make higher profits.

So, they will hold their stocks and curtail supply to the market. This will further fuel inflation. Importers may encounter problems in importing as the exporting countries may face the same situation and the government also may ban exporting fearing shortages.

 In short, traders in the market may "go slow" anticipating high prices in future and all the forces reinforces each other to push prices up. Note that all the decisions of the players described above are individual decisions.

Price may rise in the absence of any coordination or cartel or "syndicate" and this actually happens just because people think this will happen.

What should the government do? When prices rise in a way it is unfolding now in a market economy, the government does not have many options to act on. The only thing the government can do is to foresee such a situation in advance and stock up on the essential commodities so that it can pose a threat to the market.

That is, if the market goes unruly, the government can intervene in the market with supply to bring down the prices. Government does not necessarily need to intervene all the time; sometimes the threat of intervention is enough to discipline the market. It is argued that the depleted public stock of foods was one of the reasons for high global food prices in 2007-08.

The "mobile courts" in the name of market monitoring does not seem to work in such a situation. This is not simply technologically possible to monitor all physical markets. No government can do this. This is similar to enforcing mask wearing using law enforcing agencies.

As we know it did not work and it is not supposed to work. The use of law enforcing agencies to contain prices generally turns out to be counter-productive. The large traders and retailers may stop trading fearing harassments, which will further escalate the prices. We have seen such events in the period of the military backed caretaker government that wanted to remove the "middlemen" from the supply chain.

However, this analysis does not exclude the fact that there might be market power enjoyed by a few in some markets, particularly in the markets that largely rely on imports (e.g. soybean). Moreover, this market power can be exercised at the upper stream of the supply chains more (e.g. importers) than at the downstream (e.g. traders) as we know that downstream is more competitive than the upper stream. Hence, the spaces where such market power can be exercised cannot be large.

If there is any such exercise of market power, it is the responsibility of the Competition Commission of Bangladesh, not the magistrate or the police to detect and act on it. 

I conclude by asking: why is the narrative of "syndicate" so popular? It is obviously an easy scapegoat. We have limited cognitive capacity - ability to amass, store and process information.

Hence we tend to subscribe to the conspiracy theory with greater ease than bearing the costs of understanding an issue deeply because the former demands less cognitive functions. We may also feel better when we think we have found a villain to point our fingers to.

Moreover, the idea of people on the top manipulating things has a class-struggle angle and this makes it more popular and media also seems to cash in on this popularity. The situation turns worse when social and economic commentators also suffer from such cognitive constraints.

The author is a senior research fellow at the Bangladesh Institute of Development Studies. Views expressed here are personal.