Inappropriate Regulation of Appropriate Conditions

Jim via flickr || CC 2.0

While the business environment is the domain of the Ministry of Economy in Slovakia, the Act on inappropriate conditions in trade relations is the domain of the Ministry of Agriculture and Rural Development. This government institution lists among its goals the support of Slovak agricultural production. Except their heavy subsidizing under EU common agricultural policy, it uses several tools of nationalist protection of local production.

One of them is the abovementioned Act, the purpose of which is to limit the market power of multinational retailers and strengthen the position of suppliers. The whole concept of the Act, regulating the limited scope of trade conditions on the market with multiple heavily competing retailers, is precarious. While reading the text of the law, one cannot get rid of the impression as if it was written by farmers. Hopefully, the Ministry of Agriculture will be fiddling only with the business environment and won’t try to reform Slovak health care or re-arm Slovak military.

The Act was adopted in 2008 and the Ministry of Agriculture introduced a proposal of a new amendment. The framing of the law is the very first strange thing one notices – the law does not attempt to weigh the market powers of the buyer (merchant) or the seller (supplier). Simply put, b2b purchase of food products has a special legal regime and that’s it. Buyer is the bad guy, the seller (producer) is the poor one. It is absolutely unclear what is the desired outcome of this law, nor is it clear how to measure whether the goal is close to being achieved. The law created a stick, but those who are beaten with the stick have no idea why it is happening, or when would it cease.

The law crudely restricts freedom of contract, a freedom which is an inevitable condition of an efficient market economy. For example, a merchant cannot provide paid marketing information (sales, for example) about the seller’s products. Ironically, many suppliers were complaining about this feature in the law. Instead of paying the merchant to collect and share this data, the suppliers will have to hire third-party agencies to collect it.

Some big suppliers (for example, beer suppliers) used to have a well-running agreement with the merchants to cooperate on how the merchant would display and market the supplier’s products in her/his shops. Such a cooperation would be prohibited. Paid display – prohibited. Using merchant’s private brand as a condition in an agreement with a supplier – prohibited. In other words, the law turns the science of marketing into “unreasonable conditions”.

On this note, the ceiling for fines related to the Act is set at EUR 500,000. Yes, that’s correct, half a million. What is the size of public damage created by this behavior that the fines need to be so high? It would be interesting to see the lawmakers trying to calculate the potential damages. With no clear idea of what the potential damages could be, the decision making behind the fines will be totally subjective.

The saddest part of the law is the part about prices. The law significantly limits the space for independent price setting on the market – there are only a few instances allowed by the law when the merchant can sell products below their purchasing price. Almost two centuries since David Ricardo, an economic scientist, fully understood that the cost and the market price are only loosely related. Price is a market beacon which helps to drive demand and supply to a common meeting point. Demand and supply are the key to market price, not a sum of costs. A friendy reminder: Tesla has been selling cars well below their productions costs for 6 years and is one of the most admired companies in the world.

The Slovak agricultural sector is still covered by the veil of uniqueness, and this regulation is easily sold to the electorate as a great advantage despite the related costs. And the electorate, unfortunately, leaves the inner consumer of their personality at home, when visiting the polling station.

That’s the reason why INESS is taking part in the legislative process and challenges the Ministry’s proposal during the interdepartmental comments procedure. To protect consumers from the wills of suppliers.