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Public Need a Say in Setting Prices
Price monopolies have become the focus of criticism from the public. The source of the problem lies in inadequate institutional reforms and is not incurred by natural competition.

Price monopoly is realized in various ways.

Some operators of State-monopolized industries take advantage of their monopolistic position to pressure the government into setting a high price. They even adjust price levels or create new charge items themselves.

Some monopolistic enterprises illegally expand their scope of business or attach unreasonable conditions to trading to rake in improper profits, which jeopardizes the interests of consumers.

Some local governments erect barriers to block the entry of outside competitors to realize the monopolized price in local markets.

They sometimes egg local enterprises on to carry out malignant low price policies to disrupt the price order and grab the market share.

Some governmental departments designate business opportunities to the intermediaries that are formerly affiliated with them. In this case, both will benefit from monopolized transactions.

Price monopoly also occurs in competitive sectors, where some competing enterprises form price cartels to disadvantage their rivals.

The lack of a proper pricing mechanism in State-monopolized industries and the default of the supervisory and constraining mechanism are to be blamed for the rampancy of those problems.

In State-monopolized industries, the price is set according to the costs claimed by the monopolized industrial firms, plus a certain profit margin.

The claimed costs are actually the individual costs of the firms, not the average social costs, which should be the basis of the government's price-setting.

Without adequate information, the government is not able to detect the real cost. In these conditions, it is hard for the government to negotiate with the firms to decide the price level of monopolized industries' products.

And for a long time, State-monopolized industries have been required to adopt a low-price policy to stabilize the overall market price. Deficits incurred by this policy are often mixed up with deficits resulting from bad management and low efficiency in the firms, which, in return, ask for the upward adjustment of prices to make up for the deficits.

This "mixed-up" tactic is also employed by the monopolized enterprises in blurring their different types of businesses.

While they conduct naturally monopolized business, they also engage in competitive business. They take advantage of their monopolistic position to wield the power granted by the government into their competitive businesses.

The mixture of governmental administration with enterprise is another reason for the occurrence of price monopolies.

Although the State enterprise reform is going on, the government still controls a large part of economic resources. A considerable number of State firms remain the fiscal source of local governments.

When State enterprises are unable to compete in the market, the governmental departments will resort to the administrative power to monopolize the market to gain profits.

Currently, the government is not only the policy-maker and supervisor for State-monopolized industries but the operator too.

The dual nature of the government weakens efficiency in price monopoly control.

The lack of an effective market exit mechanism for State enterprises makes them often resort to "price wars," or irrational price cuts, to survive, regardless of costs or returns.

Wild price competition often puts such firms in dangerous situations. So some firms unite to form a price cartel to stem the further decline of prices.

Thus comes the peculiar economic phenomenon: operational monopoly under a low-level economic concentration, or scattered production.

From the above analysis, it can be concluded the main reason for the existence of price monopoly is inadequate institutional reform. Even operational monopoly is closely related to the problem.

Therefore, the solution should not rely solely on the easing of price control and the strengthening of price supervision. Without cutting the source of the problem - that is, the institutional obstacles - the problem of price monopoly will not be thoroughly solved.

The administrative links must be severed from enterprises. Natural monopolized industries should not be allowed to influence competitive industries. And the reform of State-owned enterprises should be accelerated to make them real market entities.

In setting reasonable industrial prices, the previous mode of costs claimed by monopolized industries to decide prices should be changed. A reasonable price should be first set through a market mechanism - for example, the bidding procedure - to force down the costs of the enterprises.

The price decision-making process should be standardized.

Presently, the government negotiates with State-monopolized enterprises in setting the prices of their products. The two-party negotiation should be changed into a multi-party negotiation, with the participation of other social forces.

And the decision-making process that involves a small circle of people should be reformed into a collective mechanism to make the process more transparent and reasonable.

The author is an official with the Price Supervision Department of the State Development Planning Commission.

(China Daily June 7, 2002)

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