HARAMAYA UNIVERSITY
SCHOOL OF AGRICULTURAL ECONOMICS AND AGRIBUSINESS
EFFECTS OF RECENT PRICE CEILING ON THE SUPPLY AND
DEMAND OF THE AGRICULTURAL PRODUCTS
A case of Addis Ababa
Zekarias Mekonnen Yigzaw
A case study report to supplement OER materials of AgShare pilot project
November 2011
The Case Study
The main purpose of the case studies is to supplement OER materials prepared for Agricultural Economics
MSc program by elaborating key practical issues reflecting the problem and context of agricultural marketing
system of Ethiopia. The study was financed by Bill-Melinda Gates Foundation (BMGF) through AgShare pilot
project. The project is implemented by School of Agricultural Economics and Agribusiness of Haramaya
University in collaboration with OER Africa/SAIDE, Michigan State University (MSU), four faculties of
members of the Collaborative Masters in Applied and Agricultural Economics (CMAAE) network. The findings,
interpretations, and conclusions expressed in this case study are entirely those of the authors. They do not
necessarily represent the view of the above mentioned institutions.
Acknowledgements
The author is grateful to the AgShare Pilot Project for financing this study. Thanks also go to AgShare project
team of AgShare pilot project of the School of Agricultural Economics and Agribusiness, Particularly Mr.
Fekadu Gelaw for his useful discussion and valuable comments provided. Last but not least I want to express
my gratefulness to the office of Ministry of Trade and Industry who provided me the necessary information
used in this case study.
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Table of Contents
CHAPTER ONE: INTRODUCTION ................................................................................................................................................... 1
1.1
Background of the Study ..................................................................................................................................................... 1
1.2
Problem Statement .............................................................................................................................................................. 2
1.3
Objectives of the study ........................................................................................................................................................ 3
1.4
Scope of the study ............................................................................................................................................................... 3
CHAPTER TWO: LITERATURE REVIEW ....................................................................................................................................... 4
2.1
Concepts of Market, Market Demand and Price ............................................................................................................. 4
2.2
Economics of Market Failure .............................................................................................................................................. 5
2.2.1 Imperfect information ......................................................................................................................................................... 5
2.2.2 Price instabilities and market ............................................................................................................................................ 6
2.2.3 Policies and institutional infrastructures.......................................................................................................................... 7
2.2.4 Feasibility of price interventions from a time perspective ............................................................................................ 7
2.2.5 Interventions resulting in undesirable markets .............................................................................................................. 8
2.3
What are the functions of Price in Market? ...................................................................................................................... 8
2.4
Why Governments intervene in price/Controls price ...................................................................................................... 9
CHAPTER THREE: METHODOLOGY OF THE STUDY ............................................................................................................................... 10
3.1
Description of the Study Area........................................................................................................................................... 10
3.2
Research Strategy ............................................................................................................................................................. 10
3.3
Sampling Method ............................................................................................................................................................... 10
3.4
Method of Analysis ............................................................................................................................................................. 10
CHAPTER four: ANALYSIS OF PRICE MEASURE EFFECT ON MARKET............................................................................ 11
4.1
Rationale for Government Intervention ........................................................................................................................... 11
4.1.1 Failure of competition ...................................................................................................................................................... 12
4.1.2 Information asymmetry .................................................................................................................................................... 13
4.1.3 Promoting equity and ensuring fair distribution ........................................................................................................... 13
4.1.4 Results of interview discussions ........................................................................................................................................ 14
4.2
Assessment and Analysis of Reaction of the Various Market Participants to the Price Ceiling ............................ 15
4.2.1 Consumers response/reaction ....................................................................................................................................... 16
4.2.2 Suppliers (retailers, wholesalers, and shop owners) response to the price ceiling. .............................................. 17
4.3
Governments Approach and Follow-up during the Price Ceiling Measure ............................................................... 18
4.4
Why Did the Government Lift the Price Controls? ........................................................................................................ 20
CHAPTER FOUR: SUMMARY AND RECOMMENDATION ....................................................................................................... 22
5.1
Summary ............................................................................................................................................................................. 22
5.2
Recommendations ............................................................................................................................................................. 22
REFERENCES ................................................................................................................................................................................... 24
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CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
For decades, global agricultural markets have been characterized by steady production and productivity
growth, slowing demand and as a result, falling real prices for agricultural produce. For instance, from 1973 to
2000, food prices fell by about 60% and agricultural prices by about 55% in real terms (World Bank Report,
2004). This decline in prices has been majorly attributed to the supply side; rapid technological progress in
agriculture means lower unit costs of production and, with competition in product markets, lower profit margins
per unit of output and lower commodity prices. Together with declining product prices, the pressure on
farmers to adopt the new technologies rose and competition in product markets effectively squeezed farmers’
profits. They accrued largely to buyers of food and agricultural products, with a consequent decrease in real
costs of food and fiber products to consumers (Gardner 2002).
It is also believed that better production methods, i.e. higher applications of fertilizer, pesticides, and an
expansion of irrigation results in a massive increase not only in productivity but also in total output. As a result,
many countries have involved in the setting of price floors in different forms in order to protect their farmers
and producers from lower prices of agricultural products. For instance in U.S.A during the 1920’s, 1930’s and
the 1933 great economic depression, several attempts were made to limit lower prices, from voluntary
participation in crop reduction and the organization of agricultural product cooperative marketing agreements,
to the federal government’s intervention to stabilize price and the Agricultural Adjustment Act declaration of
1933 (Bowers et al, 1984).
The issues of increased production in agricultural output/surplus production, a decline in the price of
agricultural output, and government support to stabilize low prices for agricultural products were also a recent
market phenomenon for Ethiopian producers/farmers. This particularly affected maize, wheat, sorghum and
vegetables such as tomato, potato and onion during mid-2004/5 when the Ethiopian Government tried to
adopt a development approach, called Agricultural-Development-Led-Industrialization (ADLI) that aims to
enhance bottom-up, broad-based economic growth. The ADLI has indeed increased national food production
as a result of the promotion and dissemination of nationwide agricultural extension packages. However an
increase in food production has not been linked with the development of markets. Hence, the existing market
with its insufficient information system and underdeveloped warehouse, storage and trading system proved
unable to absorb and cope with increased cereal production, particularly since 2004/2005 when national
surplus grain was first offered in markets in Ethiopia (Relief Web report, 2011).
As a result the government has intervened with the formation of a corporation called the Ethiopian Grain
Trading Enterprise (EGTE) that plays a price stabilization role in the Ethiopian grain markets through the
purchasing of grains at a price higher than the set price. Since 2004/05 grain production has increased
substantially every year and hence also the availability of grain, especially maize, sorghum and wheat, for
local purchase. Furthermore, to support local production and to stabilize grain market prices, the Ethiopian
Government arranged with donors to purchase a certain amount of food aid from domestic markets/farmers.
Producers were also advised to shift from producing staple cereals to cash crops, etc. However, since 2004
the objective to stabilize grain market prices through local purchases failed because of the lack of capacity
and financing on the donor and government side, and the price for some agricultural cereals remained low up
until 2006 (Relief Web report, 2011).
On the contrary, the period succeeding the 2008/9 global financial crisis has come up with a different context
resulting in the rise in the prices of food and other agricultural commodities. Inflation and fluctuation in the oil
price augmented by various natural and man-made disasters here and there are also contributors to the rise
in price of food worldwide. The rise in food price has worsened in Sub-Sahara Africa including Ethiopia.
According to a seminar report made in Mozambique by COMESA (2010, P25) - “There exists high price,
however, considerable variation across countries and commodities. For example, food price increases were
relatively small (25-39%) in South Africa, Ghana, and Cameroon. On the other hand, food prices increases
were quite large (over 150%) in Ethiopia and Malawi. Since the price increases in these latter two countries
actually exceed the price increase in the world markets for the same commodities, this suggests that domestic
factors (such as general inflation, crop failure, or manipulation of the exchange rate) must have played an
important role in the price hike”.
The report concludes that it appears that the rising food prices in Ethiopia have been the outcome of monetary
policy misalignment, the balance of payment problems resulting from sharp increases in fuel prices, as well as
a supply shortfall that was disguised by overestimated cereal production. Nevertheless it does not mean that
the international price crisis has not had an effect on the domestic price rise in staple food in these countries.
Conversely although the sources of price rise have been relatively different in each country, the policy
reactions have been similar—increased intervention in cereal markets. As anticipated, the rise in price of
staple food, in turn has enforced different governments to take different measures across the globe including
the Ethiopian government’s decision to set a price ceiling.
On Christmas Eve 2011 Christmas the Ethiopian government announced its strategy of introducing a price
ceiling to contain “price escalation”. However this approach has yet to be proven if it is an appropriate
mechanism or not. Following the week before the National Bank of Ethiopia’s announcement for raising
interest rate on deposits and loans in view of slowing down the ever increasing inflation rates, the Ministry of
Trade announced the price control/ price limit in January 2011 with the intention to stem food price inflation
(Capital, 2011).
However in the theory of economics, demand and supply function, price caps or limits force producers to sell
the products under unacceptable and, in general, below equilibrium prices. Of which the acceptable prices
would be the one that include both real (differences between cost and revenue) and imagined ones, such as
the price of uncertainty existing within the system.
And some even argue that price ceilings discourage proper functioning of the market and such setting price
below the equilibrium price will result excess demand and causes shortage in the market as it may not reflect
the true cost of producing them. The extent at which such price ceiling will have adverse effect on supply of
commodities will depend on the magnitude at which this new price was set far below the price that would have
prevailed in the absence of such government interventions the equilibrium price.
Having this in mind, therefore in this project, it is intended to investigate the effect of price ceiling measure on
the demand and supply of some selected products in Addis Ababa.
1.2 Problem Statement
In a free market economic system, scarce resources are allocated through the price mechanism where the
preferences and spending decisions of consumers and the supply decisions of businesses come together to
determine equilibrium prices. The free market works through price signals. When demand is high, the
potential profit from supplying to a market rises, leading to an expansion in supply (output) to meet rising
demand from consumers. Day to day, the free market mechanism remains a tremendously powerful device for
determining how resources are allocated among competing ends. However this is not always the case these
days, and it appears in many situations the assumptions of free market, supply and demand no longer work
and as a result measures are taken by governments, including ours, to influence prices. A price ceiling is a
government-imposed limit on the price charged for a product. Governments intend price ceilings to protect
consumers from conditions that could make necessary commodities unattainable (Wikipedia). The price
ceiling measure is one of them taken by government in the hope of correcting the outcome of market
imperfections, market failure, to prevent consumers from unnecessary price charge, to achieve a more
equitable distribution of income and wealth and to improve the performance of the economy.
On the contrary, many claim that market interventions like setting a price ceiling are wrong because even
though imposing price ceilings on certain goods may seem to be attractive to consumers, such measures in
general will end up harming the consumers that these interventions were intended to help. Furthermore, price
ceilings force producers to sell their products under unacceptable and, in general, below equilibrium prices,
and thus:
 motivate producers to switch to other goods that they think are more profitable and that are outside the
government’s radar for price controls,
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 discourage business activities/ market activities.
In the end, less and less of the highly valued goods will be available to the consumers, which negatively
affects consumer welfare. Price controls moreover, force producers to supply mostly low quality products into
the market, which may lead the economy to be filled with lower quality products than there would be
otherwise. The process eventually can create dissatisfaction on the part of the consumers. Economic history
has shown that such consumer dissatisfaction, would force consumers to shift their attention to imported
goods, which could only be obtained in the black market at times and thorough other illegal practices in the
market.
Therefore, the main focus in this project is to assess the effects of the aforementioned price ceiling on the
supply and demand of commodities. Specifically, it attempts to answer the following questions.







Has the price ceiling intervention really achieved its purpose of protecting buyers from high prices?
How did the different markets actors react to the price ceiling?
What were the effects of the price ceiling on the demand of commodities?
What was the basis for selecting those specific commodities listed in the price ceiling intervention?
Was there the necessary institutional setup to effectively implement the policy intervention?
What other complementary interventions had to be taken along with it? and,
Was the intervention timely?
1.3 Objectives of the study
The general objective of the study is to assess the effect of the price ceiling on the supply and demand of
some selected consumable items.
The specific objectives of the study are:
 To assess the effect of the price ceiling intervention in achieving price stabilization on those items.
 To explain why the government took the price ceiling intervention.
 To identify the basis for setting the price intervention
 To assess the response of the various market actors such as suppliers, business people, customers
and officials to the price ceilings.
 To investigate the overall effects of the price ceiling on the supply and demand of the selected
commodities in market.
 To review the effects of the government price intervention measures taken.
1.4 Scope of the study
Though interrogating the overall effect of the policy is useful for the purpose of having a good understanding
about the effects of setting a price ceiling, the project will only focus on some products like wheat, wheat flour,
sugar and edible oil. This is because these items are the ones for which the government is still at present
applying a price ceiling. Besides delimiting the variety of commodities investigated, the study also confines
itself to the capital of the country, Addis Ababa, as a study area because of the relatively uniform
implementation of the price ceiling measures there as well as the availability of a focus group of study.
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CHAPTER TWO: LITERATURE REVIEW
This part of the paper addresses the theoretical overview of market demand and price, government
interventions in the market, results of intervention in the market system, market reaction and results
associated with this from a theoretical perspective.
2.1 Concepts of Market, Market Demand and Price
The market is generally defined as a place where goods are being sold. But a market in the economic system
is more than just a place, where individual consumers and producers/suppliers interact through the function of
exchange. Incidentally the term market has got a variety of meanings, for example, Abbott and Makeham
(1979), defined market as an area in which exchange can take place. Thus, a market actually brings buyers
and sellers together for the purpose of exchange. It acts as an intermediary between buyers who demand
goods and services, and the sellers who produce or supply goods and services. It also applies to the people
living there who have the means and the desire to buy a product.
The market equilibrium position refers to a point where the quantity demanded in the market is proportional to
the quantity supplied, where the agreed price would be established according to the theory of the free market
economy concept. Mendoza (1995) alternatively, defined a market as a system because a market usually
comprises several interrelated structures along the production, distribution channels and consumption units
underpinning the economic process. Modern economies rely heavily on markets and prices to allocate
resources between competing uses. The interplay of demand (the behaviour of buyers) and supply (the
behaviour of sellers) determines the quantity of the good produced and the price at which it is bought and sold
in a free market /competitive market. Technically speaking a competitive market is one in which the number
of buyers and sellers are very large, all engaged in buying and selling a homogeneous product without any
artificial restriction and possessing perfect knowledge of the market at a time. In doing so the demand and
supply of commodities are governed by market set price. Demand depends on the price of the commodity, the
prices of related commodities, and consumers' incomes and tastes whereas supply depends not only on the
price obtainable for the commodity but also on the prices of similar products, the techniques of production,
and the availability and costs of inputs. Thus, in a competitive market economy the price of goods or
commodities will reach a relatively stable point called the market equilibrium price as result of demand and
supply function. Ideally these functions result in free competition by which the market economy can operate
through the invisible interactions of demand and supply.
When competition exists, resource allocation through unimpeded markets is expected to produce higher
economic welfare than resource allocation through state planning. For example, in theory, it can even be
demonstrated that, under certain circumstances, the allocation of resources by means of the market
mechanism is optimal (Arrow, 1985). Each participant in this economy acts independently from the other,
seeking their own interest, and taking as given the fact that other agents will also seek their best so that
market equilibrium is reached. This means that in each market, aggregate demand equals aggregate supply,
so the corresponding equilibrium price clears the market. However, in practice, the entire economy is not
entirely dependent on demand and supply in determining the price of goods and services. Because the
aforementioned facts in competitive conditions do frequently not apply in practice, the allocation of resources
is not optimal from a theoretical perspective and a quest for methods of improving the resource allocation
arises (Bator, 1958). This situation is described as a market failure and is a situation where scarce resources
are not put to their highest valued uses.
A market failure thus implies a discrepancy between the price or value of an additional unit of a particular
good or service and its marginal cost or resource cost. Ideally in a market, the production by a firm should
expand until a situation arises where the marginal resource cost of an additional unit equals its marginal
benefit or price. Equalization of prices and marginal costs characterizes equilibrium in a competitive market.
One of the methods of achieving efficiency in the allocation of resources when a market failure is identified is
government regulation and/or public intervention (Arrow, 1970, 1985; Shubik, 1970). It was assumed that, in
the earlier development of the public interest theories of regulation a market failure was a sufficient condition
to explain government regulation (Baumol, 1952). But soon the theory was criticized for its Nirwana
approach, implying that it assumed that theoretically efficient institutions could be seen to efficiently replace or
correct inefficient real world institutions (Demsetz, 1968).
This criticism has led to the development of a more serious public interest theory of regulation by what has
been variously referred to as the “New Haven” or “Progressive School” of Law and Economics (Ogus in
Jordan and Levi-Faur, 2004; Rose-Ackerman, 1988, 1992; Noll, 1983, 1989a).
In the original theory, the transaction costs and information costs of regulation were assumed to be zero. By
taking account of these costs, more comprehensive public interest theories developed. It could be argued that
government regulation is comparatively the more efficient institution to deal with a number of market failures
(Whynes and Bowles, 1981). For example, with respect to the public utilities it could argued that the
transaction cost of government regulation to establish fair prices and a fair rate of return, are lower than the
costs of unrestricted competition (Goldberg, 1979). Moreover, imagine an unregulated natural monopoly firm
supplying public utility services. The firm makes supernormal profits, charges different prices to different
consumer groups and does not supply services to high-cost consumers in rural areas. Without regulatory
intervention social welfare costs are at their highest and intervening in the market results in a decline of this
welfare cost. The stronger the level of intervention, the lower the welfare losses in the private sector will be.
Price controls are perhaps the simplest type of market intervention which a government can use. The
government of Ethiopia recently announced price caps on select merchandize goods and food items as of
January 6th, 2011. It accused the business participants, merchants and sellers of price gauging, hoarding and
engaging in unhealthy competition. However many issues remain unclear about this intervention like: Was it
planned? On what basis were commodities selected? How were the price ceilings determined and applied?
Was there actually market failure and therefore was such an intervention necessary?
2.2 Economics of Market Failure
As we discussed in the previous sections, when competition exists, resource allocation through unimpeded
markets is expected to produce higher economic welfare than resource allocation through state planning.
Competitive markets can lead to a Pareto optimal solution where no further redistribution of resources will
raise economic welfare. There are, however, well-recognized circumstances in which markets may ‘fail’ to do
so and this is referred to as market failure.
In this case discrepancies between values and resource costs can arise as a result of imperfect information
and competition, unstable markets, missing markets or undesirable market results. Imperfect competition will
cause prices to deviate from the marginal resource cost. Unstable markets are characterized by dynamic
inefficiencies with respect to the speed at which these markets clear or stabilize. These instabilities waste
scarce resources. Missing markets imply refers to the situation where there is a demand for socially valuable
goods and services for which the total value exceeds total cost but where prices or markets do not arise. And
finally, even if there is a competitive market mechanism that allocates scarce resources efficiently, the
outcomes of the market processes might still be considered to be unjust or undesirable from other social
perspectives. In the next section I shall discuss in detail how each of the above factors causes market failures.
2.2.1 Imperfect information
It is true that competitive market systems require market participants, sellers and buyers to be well informed
about supply, demand and prices. Large, well-organized wholesale markets facilitate the attainment of this
ideal situation by providing information on market trends, prices and quantities marketed. In a competitive
market employers and producers also have an interest in revealing the relevant characteristics of jobs and
products. However, the ‘information market’ is characterized by market failures and these failures often spill
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over to the market for goods and services (Hirshleifer and Riley, 1979). In practice, the full information
assumption of a perfectly competitive economy is rarely found. With respect to the information that is available
on goods and services in a market, it is useful to make a distinction between:
 Search goods - for which the quality of a product can be determined prior to purchase,
 Experience goods - for which quality only becomes apparent after consumption of the good, and
 Credence or trust goods - for which the quality cannot even be established after consumption (Beales
et al 1982).
The importance of information on market trends and prices is recognized by all market participants with welldeveloped marketing systems. Full information in this context covers the quantities of produce marketed,
stored and transported; the range of products, stocks, sources, destinations, varieties, quality and packaging;
as well as market and price trends. The market can be described as truly “transparent” and perfect when such
information is available and is described as being an imperfect market when the reverse happens.
Competitive markets involve a large number of buyers and sellers transacting on the basis of the available
information. Therefore, at times when a market exhibits imperfect information flow, the state has a key role in
promoting efficient and reliable market information systems because competitive, effectively coordinated
markets require that all market participants be perfectly and equally informed since basic information is a
public good. This facilitating role of the state should be perceived as an on-going process and not as a single
act. It must also be seen in logical sequence to the fundamental decision to expand the economic role of the
market participants and to the commitment to maintain competitive markets. In view of this perspective the
Ethiopian government during its intervention/price ceiling measure has tried to enforce that each marketer
from producers to retailers must deliver information to the customers pertaining to quantity, price and price
per/unit in a visible manner.
2.2.2 Price instabilities and market
The basic market coordination mechanism is price. Stable market prices signal buyers’ willingness to pay a set
amount for a good or a service, and potential suppliers are then willing to incur the costs of supplying this good
or service if these costs are lower than the price. This is how market economies function, and history has
proved the superiority of this system over state-led decisions. Markets are where producers and consumers
interact, and in a theoretical world of ‘perfect’ competition a market will produce an efficient result. Efficiency
has a particular meaning in economics i.e. an efficient position is one in which the only way to make anyone
better off is to make someone else worse off. In essence it is a condition where there could exist a stable
market price, that could be in the form of a stabilized price in the system. Markets then have the difficult task of
generating prices able to efficiently drive actors’ behaviour for the satisfaction of consumers. Prices impact on
individual decision making by conveying the information necessary for people to make efficient and informed
decisions. Any surplus or shortage can be eliminated with market clearing at equilibrium price. In economic
jargon, the marginal utility of each consumer equates price, so that it would be impossible to increase the
welfare of one consumer without depriving another from the same quantity of happiness. Even more, any
intervention on prices at this stage is likely to introduce black markets, bribery, and other illegal behaviours,
generating unnecessary rents. In a well-functioning market, prices reflect the relative scarcity of the commodity
accordingly, variations in prices reflect value differences with scares resources but price variation without
showing the difference in resource is only market failure, price instability.
A market failure may not only be characterized by imperfectly competitive and imperfect information flow
markets but also by unstable prices in markets. When this happens it results in destructive practices of market
or excessive competition. One of the outcomes may be a persistent price war. Prices may decline below
average cost and that price dispersion is increased. Both effects create inefficiencies in the allocation of
resources or in consumer decision-making. Furthermore, excessive competition in price may be
disadvantageous to safety and reliability when consumers cannot observe or verify the quality of goods and
services (Kahn, 1988). In such a situation, according to the most traditional economic theory, it is the public
authorities’ duty to correct excessive and unnecessary price variations in order to let the economic system
return to a path to long-term equilibrium from which it should have never been diverted. This is the basic
justification of state intervention in market price stabilization. However, while price intervention for stabilization
purposes is justified, it has also to be efficient, that is, curing the evil at its root and avoiding unexpected side
effects. To achieve such a target, a careful examination of the causes of price destabilization is necessary.
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Without such a careful examination, one runs the risk of curing only the symptoms at considerable cost without
having a deep and lasting effect.
2.2.3 Policies and institutional infrastructures
Food price stability and food security issues have again became central policy concerns of the Ethiopian
government as the prices of cereals, sugar, edible oil and other food commodities increased sharply in January
2011. The sharp increases in food prices fuelled inflation, induced devaluation of the birr against the US dollar
raising fears about the nation's food security, and threatened macroeconomic stability. As a result of the
increase in price, the government blamed and harassed the market actors like producers, traders and retailers
government interventions in the form of price ceiling measurement came in to effect. The government
measurement, however, has no clear strategy for addressing the policy implementation, institutional
arrangement, infrastructure, developing more effective programs of support services, and strengthening and
streamlining the central and local government bureaucracy concerned with effectiveness of the price
measurements taken. Availability of institutions and infrastructures can also influence market actors’ participation
in agricultural markets. Institutions are needed to offset the negative impact of transaction constraints (Matungul,
2002). Government is the main institution capable of influencing the institutional infrastructures that reduce
transaction costs, price raise related to transaction costs and marketing risk, for example, institutional
infrastructures reduce the incidence of opportunistic behaviours and bring trust as market participants create
positive perceptions toward these institutions.
According Parker, (1999b, 1999c) the requisites for economically efficient and effective regulation seem to be a
result of a willingness by government to establish the regulatory rules and then allow the regulators to operate
with high degrees of discretion within these rules. This creates an economic environment which is reasonably
stable so that ‘shocks’ or measurements in this context do not provoke a change to the rules or their
abandonment. This refers particularly to societies with high rates of inflation that may have difficulty maintaining
a price cap which passes higher costs on to consumers through higher prices, and a political system exists
where there is a commitment to the use and application these policies effectively in the market system. The
existence of centralized institutions that are known and easily accessible to trader and consumers reduces the
number of intermediaries in the distribution channel and improves the flow of information between market actors
i.e. both upstream producers and downstream wholesalers and retailers thus reducing uncertainty concerning
supplies and quantities in market as well as price of items.
2.2.4 Feasibility of price interventions from a time perspective
While direct public intervention in markets seems necessary under certain circumstances, the success of such
interventions is however dependent on political and institutional conditions. Inadequate or untimely public
interventions discourage suppliers’ activities in commercialization (the eviction effect) and generally decrease
efficiency. Sometimes they even increase uncertainty (Jayne et al., 2006). It has been demonstrated that, in a
context of price jumps, a public intervention aimed at containing the leap in price could indeed worsen it,
because of a lack of predictability and its untimely nature (Chapoto and Jayne, 2009). The private sector cannot
operate in an environment where governments intervene in a discretionary and unpredictable way, making
prices even less stable. State intervention is in this case is seen as lowering efficiency by limiting local
competition and market sector development. State interventions also generate rent-seeking behaviours and are
the sources of manoeuvres expected to serve the interests of specific actors.
In short, state interventions should be based on collaboration between public and private actions based on wellorganized institutional arrangements to implement throughout the measure. They should be rules-based and
relatively predictable, as well as credible, which implies sure and flexible access to financial resources and
expertise. To be legitimate an intervention has to be the result of the market actors’ discussions and
negotiations, which in turn means that institution-building for organizations such as farmers’/producers’distributors’ organizations may be a necessary prerequisite. Rent-seeking behaviour should be avoided as much
as possible through transparency, the existence of press or media freedom, and exemplary punishment of
adverse behaviours.
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2.2.5 Interventions resulting in undesirable markets
As explained in many areas, the government may choose to intervene in the price mechanism largely on the
grounds of wanting to change the allocation of resources and achieve what they perceive to be an improvement
in economic and social welfare. The main reasons for policy interventions in literature are to correct for market
failure, to achieve a more equitable distribution of income and wealth, to improve the performance of the
economy. However one important point to bear in mind is that the effects of different forms of government
intervention including price measures in markets are never neutral since consumers and businesses rarely
behave precisely in the way in which the government might want. According to the public interest theories
regulation this behaviour can result in not only by imperfect competition, unstable market processes and missing
markets, but also undesirable market results. For example price ceilings often lead to market inefficiency in the
form of inefficient allocation to consumers. More specifically the inefficiency in market is explained in the
following manner:
 Wasted Resources: Price ceilings typically lead to inefficiency in the form of wasted resources. People
expend money and effort in order to deal with the shortages caused by the price ceiling. For example
during the price ceiling implementation period for cereals, sugar and edible oils shortages created long
queues in shops, retail houses and supermarkets . The opportunity cost of the time spent queuing to
purchase these items; the wages not earned and the leisure times not enjoyed constitute wasted
resources from the point of view of consumers and the economy as a whole. Under price control, the
consumers spend a lot of their spare time searching for an item, time they would have rather spent in
family and other activities. That is, there is an opportunity cost to the time the consumers spends
searching for the item. If the market were worked freely, the consumer would quickly find the item at a
flat market price and have spare time to enjoy themselves, an outcome that would make the
consumers better off at no expense to anyone else. Price controls can create missed opportunities.
 Inefficiently Low Quality - a second way a price ceiling causes inefficiency is that under a price
ceiling goods tend to be of inefficiently low quality. The goods offered are of low quality, although
buyers prefer higher quality and would be willing to pay for it. Price controls force producers/suppliers
to supply mostly low quality products into the market, which may lead the economy to be filled with
lower quality products than would be otherwise. The process would create dissatisfaction on the part of
the consumers. Consumer dissatisfaction, in addition to being inefficient, would force consumers to
shift their attention to foreign-made goods, which could only be obtained illegally. Moreover some
merchants will be reluctant to sell their goods below the true market price resulting in less trade which
is one form of the inefficiencies that are created by the price control measures. The prices controls also
motivate producers/suppliers to produce other goods that they think are more profitable and that are
not under the government’s radar for price controls. This will result in resource misallocation and
inefficiencies in the market systems.
 Black Markets – are another potential outcome of price ceilings resulting in illegal trade activities,
specifically the emergence of black markets. A black market is a market in which goods or services
are bought and sold illegally—either because it is illegal to sell them at all, or because the sales take
place at prices that are legally prohibited by a price ceiling. Black markets encourage disrespect for the
law in general. Worse yet, in this case the illegal activity worsens the position of those who try to be
honest.
2.3 What are the functions of Price in Market?
Prices and price mechanisms are very important in the workings of a modern economy in terms of directing
decision making in the allocation and distribution of the scarce resources to various production, marketing and
consumption activities. In the free market economy there is an ‘invisible hand’ that affects price. This hand is
shaped by amongst other factors, supply and demand. Counter to this is the ‘visible hand’, the role of the
government and other external forces which can influence price directly for social or political reasons.
In simple economics terms the functions of price in the economy and also how government intervention
affects these functions of price are described in the section that follows. Price plays a very important role in
the economic system of modern economy. The major functions of price include:
8
 Distributive function: for whom to produce, where to produce. Goods and resources are limited, but
needs and wants are unlimited; so price will determine affordability.
 Allocative function: what, when, for whom to produce.
 Signalling function: Prices signal the demand and supply situations. Shortages are reflected in high
prices, and surpluses are reflected in lower prices.
 Equilibrating function: prices facilitate matching of demand and supply therefore clearing the market.
 Rationing function: Again a question of limited resources vs. unlimited wants. It is the use-limiting and
conserving function of price: higher the price the less a good will be consumed or used, and the more it
will be conserved (rationed). (http://www.businessdictionary.com/definition/rationing-function-ofprice.html#ixzz1roUZcsN6)
 Transmission function: Prices transmit information to various actors in the market thus enabling them
to make informed decisions on what and when to buy and sell.
 Provision of incentive: prices act as incentives/disincentives to consumers and producers.
 Enhancing marketing efficiency and performance: correct price signals will oil the marketing
machine. However wrong signals on price will hinder smooth functioning of the market thus resulting in
poor market performance.
 Determining decision making with respect to the following aspects: Production systems: what to
produce, by whom, and where to produce, industrial location, product market areas and market
boundaries (ISOTIMS and the Law of Market Areas), Arbitrage and patterns of trade (Spatial trade
patterns) and temporal arbitrage (STORAGE) transportation and processing. However facilitating
functions are composed of standardization, financing, risk bearing and market intelligence.
2.4 Why Governments intervene in price/Controls price
As we discussed earlier it is assumed that a market free market moves to equilibrium—that is, the market price
moves to the level at which the quantity supplied equals the quantity demanded. However this not always true
in the market due to a variety of reasons. Economists are generally opposed to price controls except in special
circumstances during emergencies such as wars, harvest failures and natural disasters, because these events
often lead to sudden price increases which hurt many people but produce big gains for a lucky few. However
one should bear in mind that putting price ceilings under emergencies would not be without negative effects but
that the positive effects of price controls in such situations could outweigh the negative effects. For example,
imposing price caps could be necessary and morally acceptable in unusual circumstances such as during wars,
unexpected crop failures, and natural disasters. Such special measures may be necessary so that dishonest
individuals could not use the sudden and unexpected situations to create big windfall gains for them while
hurting so many others. Others argue also that government interventions in the form of temporary price controls
could also be effective in managing the country’s reserves, by buying time until the reserves are put into the
supply networks. Nonetheless, both economic theory and the experiences of many nations that have used price
controls strongly indicate that using price caps as a panacea for a rising inflation is counterproductive and in
most cases, the “cure” is more damaging than the disease. Another issue arises when market failure in the
markets systems results from consumers suffering from a lack of information about the costs and benefits of the
products available in the market place. Government action can have a role in improving information
dissemination to help consumers and producers value the ‘true’ cost and/or benefit of a good or service.
The purpose of this short paper is therefore, to explain the effect of Ethiopian price ceiling measures on the
demand and supply of specific food items in line with the above mentioned theoretical frame work and try to
assess its effects using a normative approach.
9
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1 Description of the Study Area
Addis Ababa comprises 6 zones and 28 districts. The city is divided into 328 dwelling associations (Kebeles) of
which 305 are urban and 23 rural. Amharic is the working language of the city administration. Addis Ababa is
the diplomatic capital of Africa. More than 92 embassies and consular representatives are clustered in the city
where the Organization of African Unity and the UN Economic Commission for Africa have their headquarters.
Addis Ababa covers about 540 Km2 of which 18.2 Km2 are rural.
Addis Ababa lies between 2,200 and 2,500 meters above sea level. According to the 2007 Census of Central
Statistical Agency of Ethiopia (CSA), the total population of Addis Ababa was 2,739,551, of whom 1,305,387
were men and 1,434,164 were women. For the capital city 662,728 households were counted, which results in
an average of 4.1 persons to a household.
Based on these statistics the researcher believes that Addis Ababa would be suitable as a case study area
especially as it is the one place where the price ceiling intervention has been relatively properly implemented
and the effects seem to be observable. Besides, it is also true that more groups are available for study in Addis
than in other towns of the country.
3.2 Research Strategy
Qualitative research methods are considered to be the most appropriate data collecting methods and relevant
enough to help understand the decision making process in policies (Carson et al., 1998) the way decision
makers understand the meaning and content of some actions, and when the purpose is explanation rather than
predicting a given circumstance. Accordingly the functional goal of this research is an exploratory investigation
into the effects of price ceiling interventions on the demand and supply of identified food items in the market.
The research will use both primary and secondary data. The former will be collected by the researchers
through focus group discussion, interviews, document reviews and newspapers. Official reports and other
documents will be consulted for the latter.
3.3 Sampling Method
The research will use random sampling for selecting samples from the different groups of the population in the
study area. Most importantly sample units will consider suppliers, retailers, consumers, and government
officials for obtaining the required data.
3.4 Method of Analysis
The research will use descriptive methods of analysis for addressing the predefined objectives. The
researcher plans to use simple descriptive methods that include using graphical, verbal and tabular ways of
explaining the collected data. Conducting an interview is a bit difficult task particularly when the agenda is
sensitive and not clear who is actually the responsible individual to talk to, however, after a long bargaining
and negotiation process, the researcher found two individuals who were willing to have discussions around a
list of open-ended questions.
CHAPTER FOUR: ANALYSIS OF PRICE MEASURE EFFECT ON MARKET
This chapter includes three main sections. Section one works through a primary open interview discussion
with the Ministry of Trade officials. The second section deals with a secondary documents review, different
declarations given by government officers to justify the price ceiling measures announced in January 2011
and the basic economic theory of the government’s intervention in market prices. This also includes the
special circumstances under which such an intervention is justified, and how it works for stabilizing the Addis
Ababa market system. The section seeks to answer questions such as: Was the government price
intervention able to protect consumers in time and advance public interests? Were there the right institutional
arrangements put in place to support the measure? And it then looks briefly at the numerous ways that
intervention in price might not be justified. In other words, the government’s intervention in price could be
argued as being a necessary intervention tool only when the free economy of the market is unable to
maximize resources, is unable to maintain social welfare and market disorder is a common problem.
Section three of this chapter explains the market reaction from suppliers, retailers, supermarket owners,
shoppers, market participants and most importantly, consumers, who were the ultimate beneficiaries of the
price control measure implemented by the Ethiopian government.
4.1 Rationale for Government Intervention
Markets play such a central role in our economy. Under ideal conditions, they ensure that the economy is
Pareto efficient but there is often dissatisfaction with the market. Markets, particularly if they are free usually
work well, ensuring an efficient allocation of resources between different consumption and investment
activities. However, there are many circumstances in which market forces fail to maximize economic and
social welfare and as a consequence, there is a need for Government intervention. There are several
important conditions under which markets fail to allocate resources efficiently. Failure of competition, public
goods, externalities, incomplete markets, imperfect information and unemployment and other
macroeconomics disturbances are the reason why markets can fail to work efficiently. Each type of market
failure provides a rationale for government interventions.
In the same way our government surprised the public on January 6, 2011 (the Ethiopian Christmas Eve), by
announcing price caps on selected items such as meat, bread, rice, sugar, powdered milk and cooking oil.
Prime Minister Meles Zenawi said the caps were a response to inflated price implemented by merchants who
were taking advantage of global price hikes. He vowed to put a stop to what he called "market disorder”. The
Ethiopian government, furthermore, claimed that the market disorder was because of trade activities of
“greedy” businesses and speculators that were causing the inflation. As result, food prices were subsidized to
placate the vulnerable urban poor and the salaried government employees. This was in addition to what the
Ethiopian government had done several months earlier to help curb chronic inflation by adopting a contraction
monetary policy subsidizing the price of wheat, edible oil, and removing all taxes on flour and grains before
introducing the price capping measures. These interventions created a breathing space for vulnerable low
income groups and retirees.
But because the impact of the subsidy program was only effective for a short period of time, it was obvious
that when short-term policy actions leave the scene, inflation once again comes back to bite. Apparently, the
price of many food and non-food items has gone through the roof recently and so the Ethiopian government
on January 6, 2010 adopted another short-term measure: the introduction of price control on selected
domestic and imported items. Government officials have been quoted in many newsletters as saying price
controls were needed because retailers had raised prices blaming this on global price increases and the
currency devaluation, although such factors have had no influence on the availability of their products.
However, economists argue that in a free market economy the preferred way of correcting market disorder is
to:

Increase the supply and increase competition or

Increasing the number of market suppliers to reduce shortage,

Creating a means of equal access to market information as well as
11 | P a g e

Reducing barriers to new entrants who can increase competition and reduce monopolistic power in the
market so that the problem could be solved from its root.
Accordingly failure to assure these factors in the country’s economic structure would inevitably result in
market disorder. This means that any attempt to restore the market without considering these factors will only
be short lived market therapy and at times may even worsen the problem and lead to more price
destablization. It is worthwhile, therefore, for someone who is discussing market failure to consider these
factors and how they can create disorder in markets within and Ethiopian context particularly in Addis where
this study was carried out.
4.1.1 Failure of competition
Theoretically, for a market to result in Pareto efficiency there must be perfect competition. That is there must
be a large number of firms that each believes that it has no effect on price and instead use the market price.
But if there are some firms that have market power and hence have the ability to affect price, then market will
fail to be competitive and allocation of resources will generally be Pareto suboptimal. There are varieties of
reasons why competition may be limited. For example, in some industries, there are relatively few firms with
one or two firms having a larger share of the market. When a single firm supplies the market, we refer it as
monopoly. When a few firms supply the market, we refer to this situation as an oligopoly. And even when
there are many firms, each may produce a slightly different good and may thus perceive itself facing a
downward-sloping demand curve. We refer this situation as monopolistic competition. Sometimes also
there a natural monopoly, it is a situation where it is cheaper for a single firm to produce the entire output
than for each of several firms to produce part of it. All these conditions in economics are indicators of
imperfect conditions. Under such imperfect competition, price is greater than marginal cost, or marginal
revenue is greater than price unlike where marginal revenue is equal to marginal cost and price in a
competitive/free market.
Ethiopia is referred to as having a ‘free market economy’, since 1991 when the current government took
power from the socialist party. It has instituted various measures to stabilize the economy which is assumed
to be led by the interaction of demand and supply. According to the Ethiopian government and reports
obtained from different government officers and media sources such as government owned newspapers like
“Addis zemen” and the “Ezega.com report” and other medias including ETV, the price hike which the
consumer has been facing is not linked to economic principles. For example, the General Director of the
Ethiopian Revenue and Customs Authority told a group of traders gathered in the meeting hall of the Prime
Minister’s (PM) Office (see the pictures below)that the disorganized trading system is due to the main traders
(business people’s) wrong but deep rooted thinking and their practice of illegal wealth accumulation which has
resulted in increment in cost of products. He went on to say that there was no healthy competition in the
country’s trade business, owing to the government’s weak regulations and due to the wrong attitude of the
businessmen. This created a market situation where a few family members were able to take control of the
entire market. He substantiated his claims with an example of the flour factory businesses, saying that there
are 147 flour factories but only 50 of them have control of 65 % of the flour market, according to official
reports. He went on to say that
“An average of 53% of the market in each of the commodity types is controlled by only 30 top
businessmen.”
Sources: ezga news.com
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Figure 3.1 Ethiopian business people being addressed at a gathering to discuss the new market price
measures
As a result of the discussions the government plans to eliminate market disorder in a way that creates
competition. However, until the full implementation of this plan the government will take initial remedial action
by intervening on the market by announcing fixed maximum prices on basic consumer commodities.
Thus, generally, it can be assumed from this discussion the level of competition in Ethiopian markets is too
weak to prevent market failure indicating that the problem of increases in price for commodities is related
partially to the problem of an imperfect market structure. Markets are not able to deliver economically efficient
outcomes in the absence of effective competition. Where markets are imperfectly competitive, the output of
goods and services will be lower and the prices of goods and services higher than they would be in
competitive markets. Imperfect competition may also weaken incentives for innovation affecting the future
supply of new goods and services.
4.1.2 Information asymmetry
In economics and contract theory, information asymmetry deals with the study of decisions made about
transactions where one party has more or better economic information about products and services than the
other. This creates an imbalance of power in the market (buyer-seller) exchanges which can sometimes
cause the transactions to be skewed in favour of certain people. Most commonly, information asymmetries are
studied in the context of principal-agent and shopping decision-making problems. Competitive markets
depend on consumers being able to make informed choices between different suppliers, in the absence of
monopolistic market structures. Information failure occurs when producers do not inform their consumers (at
little or no cost) about the nature, variety and availability of their products.
Economic information asymmetry is the key building block of revenue management for producers and traders
(sellers). Would-be customers and consumers have far less knowledge of the manufacturing value of
products, future sales rates, products price structures and availability than do the product and service
providers. Even with the relatively transparent pricing on various consumer-friendly websites, customers and
consumers do not know the extent of demand and economic features for their desired itineraries reflected in
the final consumer price structure. For most consumers nowadays buyer - seller information asymmetry is a
growing problem from a consumer rights protection perspective despite having access to electronic modes of
free global communication.
In short, a market is said to be free from information failure when:

the information available to consumers and markets helps individuals to make better informed
decisions,

cost of obtaining information is low;

information is easily accessible and available.
Information asymmetry may also provide another rationale for Government intervention in markets and this is
mostly true with regards to public services such as health care and education. The economic role of
government in production and marketing is based on the premise of market failure, i.e. when the invisible
hand of price and free market fails to work properly. Market failure can also occur due to information
asymmetry. All market participants whether producers, buyers, sellers or ultimate consumers need adequate
information in order to make appropriate decisions and operate efficiently. Government interventions, for
example, in the form of price controls are required when there is market failure during price inflation. The
assumption behind the price ceiling is to protect the consumers in times of shortages when prices become too
high for majority of consumers to afford. On the basis of this argument the Ethiopian government set price lists
on January 2011 for the protection of consumers from high price.
4.1.3 Promoting equity and ensuring fair distribution
Beyond matters of economic efficiency and promoting maximum production and wealth, government may
intervene in markets to address the inequitable distribution of wealth and income. Government has an interest
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in promoting equity for social (compassion) and economic (distributive efficiency) reasons. It has an interest in
promoting equal treatment for both social (fairness) and economic reasons (efficiency).
For example according to a report submitted to the House of Peoples’ Representatives on the 18th of March
2008 -reducing transport, distribution and related costs contribute a lot to the control of inflation and increases
in price apart from when global price increases remain high due global market structural changes. On the
other hand, the Government, made efforts to expedite sustainable solutions through actions such as
government distributed cereals and imported items, along with efforts being devised and made to implement
temporary price controls. These include the provision of direct and indirect subsidies. Subsidies are used to
protect consumers from shortages and ensure affordability by the poor or low income group whom are the
victim of price increases. Direct subsidies have included Government expenditure to stabilize fuel prices and
to sell wheat at lower price for low-income populations. In the last few years the Ethiopian Government has
spent 3.52 billion birr to subsidize fuel and another 372 million birr on wheat subsidies, according to some
official reports.
In a similar fashion after two years, in January 2011 the government came up with another price controlling
measure to stabilize price increases as the government claimed that “greedy” businesses and speculators
were the cause of the inflation and increase in prices of food. The government subsidizes food mainly to
placate the vulnerable urban poor and the salaried government employees who cannot afford to pay inflated
prices for commodities.
4.1.4 Results of interview discussions
According to the Ministry of Trade, the price ceilings have been put in place to achieve the following
objectives:
1) to protect low income groups from speculative business people who started to charge consumers unfair
prices as a result of world price instability and a rise in world prices for items like coffee, sugar, and
edible oil;
2) to avoid possible further price increases that could occur due to trader speculation and hoarding in
anticipation of planned salary increments for civil servants;
3) the first price ceiling measure was for only 18 items and served to protect low income groups that are
highly dependent on these items for their basic needs (see list of selected items in the appendix).
Gradually, these measures have gradually moved to include more items (other than the basic ones)
such as paintings, iron sheets, cement, beer, soft drinks etc.
4) to prevent the laying off of many daily workers and perhaps to increase more employment opportunities
for many others by assuring the continued smooth functioning of the construction sector through
providing necessary basic materials like cement, iron sheets, paints at a fair price so that the sector will
continue to contribute to the growth and development of the country.
A committee based approach was taken when deciding on ceiling prices with several committees and subcommittees from different departments participating in the process. These included the Ministry of Trade, the
Central Statistics Agency (CSA), the Prime ministers Economic Advisory Office, the Office of Revenue
Authorities, Ministry of Finance and Economic Development and others from operational units at district level.
Each price was calculated by considering all the different costs associated with the items. Some people felt
that the pricing was random, not planned and did not reflect the actual price of items. However the people
interviewed for this case study did not agree with what some people were saying about the process. They
went on to emphasize that the existing situation of inflated prices was due to the unregulated behaviour of
business people, those who were making 2, 3, 4 and sometimes 10 times fold price profits. It was these
people were the ones speaking negatively about the intervention. However the interviewer was informed that
the documentation outlining the processes used to come up with the prices is available but has yet to be
circulated publicly.
The ceiling price measure as a government policy and strategy is supposed to be a short term plan just to
curb inflation and make markets more competitive. However, the government also has also parallel plans that
14 | P a g e
are being implementing on the processes needed to increase the number of market suppliers and
wholesalers, separating the functions of supplying/importing, wholesaling, and retailing so that the chain and
monopoly of items is cut so that no-one can dominate/monopolize a market. It has been also realized that
there is a need for awareness creation about these market related government measures among business
owners and consumers to facilitate adaptive change and avoid resistance. It was observed that lack of
cooperation from Ethiopian society hampered these government efforts to curb inflation and resulted many
complicated cases that have contributed to the lessons learnt and will be incorporated and considered when
implementing subsequent price ceiling measures after January 6, 2011.
During the group discussion a number of questions were asked and discussed:

Why Addis Ababa was selected?

Were there other complementary actions/institutions to implement the policy?

Was the intervention timely given all the national and international situations?

Can we say the intervention has achieved its purpose?
W/O Almaz, Head of the Inspection and Controlling Units answered the questions and pointed out that the
decision to focus on Addis was strictly a practical decision and was not politically motivated in any way.
Addis Ababa was selected because:
a. It is a centre where many civil servant employees to live that were considered to be the victims of
inflation and price increases.
b. From the suppliers point of view it is in Addis where most importers, wholesalers, and retailers are
found and they form the majority of market players in terms of the supply function of the market.
c. From an inspection and controlling point of view Addis was chosen and then the experience gained
from would be expanded throughout other regional cities and administrative towns.
Regarding the supplementary actions and institutions there were many government offices and legislative
bodies which were involved and are still are involved starting from the top in the Prime Minister’s office down
to the lower level of Keble administration.
In answer to the question about the timing of the intervention it was felt that the timing was right, because
government succeeded in rescuing its citizens from sky rocketing price hikes. These could have resulted in
unnecessary social, economic and political instability in the future.
It was however agreed and accepted that the measure was not perfect and was not free from obstacles and
challenges. Some of the problems faced and still being faced in the process were /are lack of cooperation
from different societal groups, particularly, the business groups who had never been exposed to modern
marketing behaviour. Their lack of ethics and greedy nature in deciding their profit margins resulted in their
trying to avert this measure by creating shortages and providing poor quality of items or services. Some even
tried to change their business from those items under price control to those which were not ,for instance it was
very common to be served draft beer instead of ordinary beer because beer was under the control of the price
ceiling measure. It was also pointed out that one should bear in mind that price ceiling interventions are not a
reflection of failure of government policy in the market but are rather a short term tool that any government
including developed nations use to stabilize markets.
4.2 Assessment and Analysis of Reaction of the Various Market Participants to the Price Ceiling
In order to better understand the reaction and effect of the price ceiling on market participants, it is better that
they be looked at separately as each of the different market players do have unique objectives to maximize
and/ or minimize.
15 | P a g e
According to a report made on January 25th 2011by Voice of America (VOA) in an article titled “Price Controls
Cause Chaos in Ethiopian Markets” the following was said:
“Confusion has been the order of the day at shops and markets across the Ethiopian capital,
Addis Ababa at the month of January, 2011. The government surprised businesses on January
6, the Ethiopian Christmas Eve, by announcing price caps on such items as meat, bread, rice,
sugar, powdered milk , cooking oil and off course other items.
According to this report Prime Minister Meles Zenawi said the caps were a response to price
gouging by merchants taking advantage of global price hikes and he vowed to put a stop to what
he called ‘market disorder’.”
Moreover the report also narrated that:
“The price controls on many staple food items ordered by Ethiopia's government early this
month, that is early January 2011, have reduced grocery bills for many low-income families or
consumers in this context. But now shopkeepers are upset and some basic items are
disappearing from store shelves. Economists are concerned about the long-term effect of the
government's price-fixing strategy. But how specifically was/is / the effect of this policy measure
has resulted on consumers in the market?”
4.2.1 Consumers response/reaction
The VOA article went on to report that:
“The news of price ceiling was seen as a Christmas gift by many cash-strapped consumers, who
had seen food prices jump after the government, devalued the local currency, the Birr, by 17
percent in September 2010.
In the first days after the price controls went into effect, Shenkut Teshome was among shoppers
who rushed to markets to scoop up goods at newly lowered prices. He applauded government
intervention as the only way to save impoverished Ethiopians from starvation.
‘People are hoping they can buy with their salary a fair material at a fair price,’ said Shenkut.
‘Prices were exaggerated and people cannot afford to buy with their salary and live at the same
time, paying rent, this and that. The main thing is that they have enough food for their children.’
The price controls, however, triggered chaos and tension in the local marketplace. Arguments
and even occasional fistfights have been reported between irate shoppers/customers and
business operators as price controlled goods, such as cooking oil, sugar and oranges, have
disappeared from shelves.”
The price controls had created another problem that of shortages of each of the price controlled basic
items on the shelves of retailers, wholesalers and supermarkets.
“Finally, one customer at shop, who spoke on condition of anonymity, quipped that the net effect
of the price controls is that nothing has changed. He said that earlier, goods on the shelves were
too expensive to buy but now the prices are lower, but the goods have disappeared”
In further news article dealing with this issue it was reported by VOA (on 14th April 2011) it was said that:
“Another customer Tesfanesh Zewde said she stood in line for more than an hour in the hot sun
this week to buy a liter of cooking oil and two kilograms of sugar for her family.”
Long lines were becoming a regular phenomenon in Addis Ababa as people queued at government
shops to buy sugar and edible oil (See the picture below).
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Figure: 3.2. People queuing for basic items at a distribution point in Addis Ababa
Source Ezega.com
Another customer named Betelhem Rehobot (a clothing store worker) said in an article dated 21st June 2011
on
the
ABC
News
website
(http://abcnews.go.com/International/wireStory?id=13892427&page=2#.T4g27FF4ark):
“The price ceilings felt like “payback time” against business owners. She said the adjusted food
prices were a big relief to her at first. But instead of stabilizing the market, the price controls
soon created shortages of goods and forced businesses to choose between bankruptcy and the
black market because of non-existent or narrow profit margins. The government has
monopolized the sale of sugar, oil and flour, products which still have price ceilings. Betelhem
says she doesn’t have time to wait in line for these items at government distribution points. But
consumers have fewer choices than ever: many retailers say they now can’t afford to sell oil and
sugar because of narrow profit margins.”
One can conclude that initially the price ceiling was welcomed however; gradually customers themselves
started to complain about it as they perceived that it was not a lasting solution to the price increases but
instead resulted in the development of problems such as shortages or the total absence of basic items like
sugar, edible oil. This situation resulted in people wasting valuable time whilst standing in line to buy only
small quantities of these items.
4.2.2 Suppliers (retailers, wholesalers, and shop owners) response to the price ceiling.
The VOA article dated 25th January 2011 reported that:
“Business owners said the past few weeks have been unbearable. Customers are unhappy,
some products they bought before the price caps must be sold below cost, and neighbourhood
government representatives drop by several times a day to check that they are in compliance.
Shopkeepers contacted and interviewed for this report all said they were not happy to give their
names, but one who agreed to speak anonymously said she was ready to give up. She said,
‘This is why too much for us. We are small traders. We don’t make much money. We get
everything on credit, so when this stock is gone, we are closing up shop’.”
An Associated Press article dated 22nd June 2011 ( http://www.abugidainfo.com/index.php/18268/)
reported that:
“Butcher Wabe Habse, said that when government imposed price controls in January to combat
the spiralling cost of staples like meat, cooking oil and bread, he had a long line of customers,
but could barely make a profit. Now, after price controls were dropped earlier this month, that is
July 28, 2011, Wabe is still not making money. ‘The meat market has collapsed,’ said Wabe,
17 | P a g e
who raised his prices nearly two-fold and saw his customers abandon him. ‘I am not sure how
we are going to survive.’ Buyers and sellers in Addis Ababa say the government’s attempt to
bring down prices by imposing price caps on basics like oil and sugar for five months this year
has caused even more turmoil. When they were in place, the price caps bankrupted us in
essence that could not afford to sell at cheaper prices.”
In the same article it was also reported that consumers started a text-message campaign to boycott meat in
an attempt to force prices down. Wabe was reported as saying the campaign had affected his customer base
but he could not afford to reduce prices because it would result in loss of profits. Fed up with the rising
inflation and spiralling food prices, consumers’ purpose of the text message campaign was to show disgust at
the food situation in the country, hoping that the campaign would force meat prices to come down.
A customer who chose to remain anonymous made the following comment to the researcher:
“As a consumer I am glad that prices of some products and food items decreased, as prices of
these items were becoming ridiculously high every day. Prices of some common consumer
products have been increasing every other day if not daily. Small kiosks will constantly increase
the price of cigarettes so that amazingly you cannot be sure how much you will be charged
when you go to get one.”
In the weeks following the implementation of the price ceiling some of the prices that were inflating ridiculously
eased to some extent due to the price cap. However problems were rising in some shops because some
places were refusing to sell the products at the fixed price. Adding to this, some butchers were no longer
serving highly priced quality meat and began selling grilled meat instead of raw. Most Ethiopians adore raw
meat but it was impossible to get it at the usual places as they did not offer the appropriate cuts of meat
anymore. At some places they even stopped selling beer and soft drinks. The anonymous customer went on
to say that “on those days, days following the price cap, I went a bar in Kasanches that offered only draft beer
at 12 birr and did not sell bottled beer.” “Some small groceries that used to serve you bread, injera and hot
sauces for free were then charging a lot of money for it separately,” a discontented meat lover said.
The situation arose where items affected by the price ceilings also seemed to be scarce in the market as
retailers were refusing to sell them with the small margin the government had set. And yet some traders were
still refusing to abide by the price cap as they were giving out legal receipts that clearly violated the price
fixation a clear indication that the price control measure was not effective. On the contrary, other traders said
that the government had not considered their working conditions including the ever increasing rental fees;
they started abiding by the rule immediately after it was announced.
Overall, however, the public seem quite relaxed despite these incidents, and was really enjoying the price
fixation. At the end of July 2011 the price measure was again lifted without any official reason given by the
government.
4.3 Governments Approach and Follow-up during the Price Ceiling Measure
Many leading economists blame the Ethiopian government’s economic policies and strategies for the turbulent
situation in the food market. Most of them term the government strategy of imposing price caps as a “fool’s
errand,” accusing it of taking the measure without considering the causes of the rampant inflation. Some of
these economists suggest that Ethiopia should focus on minimizing its intervention in the “free market” in
order to create a healthy economy. Recently, European Union companies complained of frequently changing
laws, varying interpretation of the law, and difficult and bureaucratic business environment in the country.
Some others still say, the Ethiopian Government imposed price caps in a bid to rein in potential unrest and
public anger over rising prices of essential commodities. Earlier, neighbouring Uganda, too, witnessed violent
protests overwhelming the country as result of rising cost of living.
But government officials have been quoted in many domestic and international media as saying price controls
were needed because retailers had raised prices blaming global price increases and the devaluation, although
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such factors had had no influence on the availability of their products. But government authorities never heard
of how these basic food items prices were fixed and yet even during the meeting on January 20011, in the
Prime Minister’s office with business people, Ato Ahmed Tusa, State Minister of Trade, announced fixed
maximum prices on basic consumer commodities. The minister listed fixed prices on 18 basic necessity
commodities, such as palm oil, sugar, fruits, bread, flour and others (see the appendix). However there was a
lack of clarity with regard to a number of issues that needed to be considered for example:

for whom the price will work,

who is a trader,

difference in rank among hotels, restaurants

cost natures associated with such variations, and

which body was to follow up and regulate the price measures.
Nevertheless Ato Efrem Woldesellassie, head of the Trade ministry’s regulatory affairs department, reported
that a government survey determined that the market failure was due to excessive profits charged by
wholesalers and retailers. He said the ministry decided to limit profits to 4-6% on sugar and cooking oil. The
traders had previously been used to getting big profits, without paying any tax to the government. But this time
they were limited to a profit of 6% for sugar and 4% for palm oil. Covering all costs, this profit margin was
deemed sufficient for them to survive. He went on to say that price controls and government sales outlets
were considered a temporary measure until the market stabilized. But market economists and business
people argue that any state interference in the buyer-seller relationship is ultimately counterproductive.
One of many, who criticized government price ceiling, Temesgen Zewdie, finance chairman of one of
Ethiopia’s main opposition parties and a former Member of Parliament, referred to the price controls a step
toward a Communist-style command economy. “In a free market economy, the preferred way of doing this is
to increase the supply and increase competition," said Temesgen. "But the government did not do that.
Instead they went directly to the producers and retailers, telling them to reduce prices and supply these
products. These practices happen in Communist states, not in western democracies where free markets
operate. (VOA: Report 2011).
Another prominent financial analyst and retired opposition leader Bulcha Dimeksa is a former deputy finance
minister and also a former World Bank director said, that history had proven time and again the folly of price
controls. "This government is doing exactly what all the classical dictators in the past have done and have
failed," said Bulcha. "I do not understand how people do not learn. It does not work. Price control never
worked. It will not work. It does not work. It may work for one month, but what’s that? The farmer is
discouraged, the producer is discouraged, the retailer is discouraged and other market players are
discouraged.”
Conversely, while acknowledging that import based inflation is unavoidable, Prime Minister Meles promised to
curb the soaring prices of locally produced items by creating a better chain of supply to retailers from the
producers, in addition to the price fixation measure. If this failed due to lack of cooperation from business,
Meles cautioned that the state would import basic commodities and distribute them itself to consumers
regularly across the country. Moreover, in February 2011 Prime Minister Melse Zenawi announced that the
market had effectively failed. He said the government would bypass retailers and sell directly to consumers
until the business community accepted the lower prices. He went on to say “we plan to flood the market to
overcome artificial shortages that have been created through inefficiencies in the market system. This
includes artificial shortages in edible oil and sugar. We intend to import lots of edible oil and sugar and flood
the market to ensure it is stabilized,” Meles urged businessmen to support the government’s effort towards
creating a modern market environment by working as per the law. If not, the government would be forced to
cut the fingers of illegal businessmen, he warned.
Ethiopian Chamber of Commerce President Eyessus WorkZafu says the price ceilings are another step in a
long-term trend in Ethiopia toward greater state control over the economy. “The government is becoming
more and more preponderant in the economy in recent years, more than even 10 years ago. The long-term
solution is not working on the assumption that government alone could bring about the balanced and rapid
sustainable economy growth and development. It cannot. That paradigm has been tried for many years and
failed.” Eyessus said.
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Eyessus says he sees great danger in the state’s increasing tendency, to demonize the private sector when
economic policies don’t work. “When the first price control measures were announced, we started reading in
the paper a very serious malignant hate campaign, letters, articles in the papers, and many have been
engaged in widening the split between consumers and merchants or business people. The government will
have to take the initiative to normalize things, because if the government does not, the differences will widen,
and the ultimate consequences could be serious,” Eyessus said.
Overall, the way the price cap measure has been implemented and the question of its effectiveness in
keeping rising prices down, and the targeted purpose created a dilemma. Good evidence for this was the
government statistics agency reports of an inflation rate of 14.5% in February 2011 from 10.2% in November
2010, a month with no intervention. When the controls are inevitably removed, experts say prices are bound
to jump to where they would have been anyway.
Apparently the price ceiling measures taken in Addis Ababa in particular and the nation as a whole could be
said to have failed as a long lasting solution to the rising price and inflation and has instead created many
complicated problems.
4.4 Why Did the Government Lift the Price Controls?
Although the Ethiopian government has not officially announced the abandonment of the price ceiling
measures, the price ceiling has not been enforced since July 22, 2011 this is according to the Associated
Press Report and people’s day-to-day observations in shops, supermarkets or restaurants.
Economist Seid Hassan, who was born in Ethiopia but is now a professor in Kentucky said imposing price
caps to fight inflation, has been “a fool’s errand. The measure was taken without any careful study about the
causes of rampant inflation, and the ruling party took the measures to distract public anger and potential
unrest,” said the economics professor, who teaches at Murray State University. If it wants to create a healthy
economy, Ethiopia should “minimize its heavy interventions in the ‘free’ market,” he said.
In the last week of July 2011, the International Monetary Fund welcomed the decision to lift most of the price
controls and urged the government to further improve the business climate and avoid “overheating” its
economy, which has one of the highest growth rates on the continent. Ethiopia pumps huge amounts of
money borrowed from foreign donors and provided by its central bank into its economy to support massive
infrastructure projects. The IMF said Ethiopia’s inflation was mainly caused by this excessive growth of
money supply and the country is not, as the government claims, a victim of rising international food prices. In
fact, global food prices have a minimal impact on agricultural economies like Ethiopia’s, economists say
(Associated press report July 2011). The Ethiopian government on January 6, 2010 adopted another shortterm measure: Price control on selected domestic and imported items. The impact of the subsidy program
like price control was only effective for a short period of time. It was obvious that when short-term policy
actions leave the scene, inflation once again comes back to bite. While it is difficult to kill inflation with only in
short-term measures, such as price freezes, they are important if inflation becomes a scourge on the
economy. A temporary price freezes could help suppress inflation and serve as an instrument to break a
possible wage-price spiral. Price freezing is usually used when monetary policy has proved to be ineffective.
Therefore, price control, as a short-term strategy to curb inflation, is not without risks. If governments resort to
freezing prices, doing so with the belief that the price shocks are transitory, it will evaporate soon. Such
measures could encourage people to consume more and creates shortages that call for additional measures
whenever there is a price hike. Once in place, it is difficult for governments to withdraw price freeze measures
for fear of losing support. Measures of price control could worsen shortages, and help the black market
flourish. If these measures are kept for too long, they will serve as a means to interfere with the dynamics of
demand and supply. Such short term measures are ineffective in Ethiopia due to the structural weakness of
the economy, an inefficient marketing and distribution system, as well as the prevalent oligopoly and
corruption. To effectively bring both inflation and inflationary expectations under control in the long run, the
government has to adopt long-term policy measures such as closing the gap between aggregate demand and
supply. This requires, according to economics theory, the need to address structural problems in the
economy. While monetary policy is essential to serve as an anchor to control inflationary pressure, it is
ineffective if the growth in money supply is not in harmony with the growth in demand. If the fiscal policy is not
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influenced by monetary policy, it would be hard to stop runaway inflation. On the other hand, if the growth in
reserve money (money in circulation and reserve requirement) is not brought down to a single digit level, then
the fight against inflation in Ethiopia could be out of control.
And still many agree on the point that successful implementation of long-term inflation and price control
measures also require a vibrant central bank. The government has to give top priority to bolster the capacity
of the central bank. It also needs to cut out some of the “fat” from its budget, boost agricultural productivity,
introduce efficient market infrastructures, support and encourage private commercial farms, encourage biofuel farms, and industries.
Finally, temporary price controls could also be effective in managing the country’s reserves, by buying time
until reserves are put into the supply networks. Nonetheless, both economic theory and the experiences of
many nations that have used price controls strongly indicate that using price caps as a panacea for a rising
inflation is counterproductive and in most cases, the “cure” is more damaging than the disease.
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CHAPTER FOUR: SUMMARY AND RECOMMENDATION
This particular chapter consists of a brief summary and conclusion of the report based on the analysis of facts
and reports presented in the in preceding chapters.
5.1 Summary
Markets usually work well, ensuring an efficient allocation of resources between different consumption and
production activities, demand and supply roles. However, there are many circumstances in which market
forces, if left to themselves, will fail to maximize economic and social welfare and, as a consequence, there
may be a need of government intervention to correct market failures and disorder. There are many reasons
why governments do so to ensure:
 efficient allocation of resources
 equity and distribution,

Protection of consumers and producers
Although price ceiling interventions may be suitable to use during emergency situations like in case of drought
and crop failure, flood and other natural disastrous and war time as well as a short-term strategy to curb
inflation and price rise up, they are not without risks. Such measures could encourage the market or
consumers to consume resulting in an increased demand and discourage producers/suppliers from providing
an increased amount and variety items to the market. Measures of price control could worsen shortages, and
help the black market flourish. If these measures are kept for too long, they will even worsen the dynamics of
demand and supply. Such short term measures are/were ineffective in Ethiopia due to the structural
weakness of the economy, its inefficient marketing and distribution system, prevalent oligopoly, a lack of
larger numbers of producers and suppliers, and as said by government officials, a lack of modern and
regulated business behaviour.
Therefore, to effectively bring both inflation and price increases under control in the long run, the government
has also adopted long-term policy measures that can help close the gap between aggregate demand and
supply. For example the Ethiopian government in an effort to counterbalance the negative effects of the price
ceiling intervention, is trying to increase the supply of items such as sugar by enabling factories to utilize their
full capacity and increasing the production capacity of sugar factories. It is also increasing production and
productivity by through supporting mechanized efforts to produce agricultural outputs as well as technology
extension programs for farmers so that supply would equalize with the created demand in markets. The
government also now acknowledges that when price ceiling interventions are to be implemented there is a
need to create an awareness with the various stakeholders in society so as to work hand in hand when
formulating different decrees that will impact on and shape market imperfections and irregularities.
However it is clear from the findings of this study that market participants on both from the supply and
consumer side did not welcome the price measures used in Addis Ababa as they were seen to have created
many subsequent problems. Thus, as many agreed that the outcomes of this measure indicated towards what
was supposed to be done ahead of the measure and what should be done even to avoid the measure itself as
long last solution for price rise up and inflation.
5.2 Recommendations
This section of this paper outlines the major findings of this case study on implementing market price controls
and makes recommendations with regards to what needs to be taken into consideration when implementing
such controls in the market.
 January 6, 2011 the price ceiling intervention was welcomed by consumers in its early phase; however,
gradually consumers themselves were not happy since it comes up with other complicated problems of
shortage of items, poor quality service and unnecessary waste of time due to long queues at
distribution points.
 By the same token, almost all producers/importers, suppliers, whole sellers and retailers were not
happy with the price ceiling measure for a number of reasons:
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o
the price setting did not actually take into consideration the cost factors associated with
importing using hard currency, the different legal and transportation fees, costs for labour and
sales people as well as the rent costs for shops. This resulted in them barely making a profit.
o even after the price ceiling was set it was not done uniformly instead practice showed that
people who had contacts inside regulating bodies were favoured and could sell out of the price
ceiling, and
o thirdly the government had started off encouraging the idea of a “free market” that supported
business people to do whatever they had wanted to do in past few years, and now were
wondering why government had seen fit to institute an intervention that went against this.
 From government point of view is that any effects felt by business people were due to:
o
lack of awareness,
o lack of cooperation,
o bad trade behaviour, and the greedy nature of business people monopolising the market.
The government felt that the prices at which items were fixed during the measure had a sufficient profit margin
for each unit of items sold on the market.
Therefore, as we can see from the above three perspectives that it would have been advantageous if the
intervention were implemented done in a manner that would maximize the global interests of all parties
involved in the process.
 On the other hand, from economic theory and the economists’ point view, measures of price control
could worsen shortages and contribute to a flourishing black market. Such short term measures were
ineffective in Ethiopia due to the structural weakness of the economy, monetary and physical policies,
an inefficient marketing and distribution system, and the prevalent oligopoly and corruption.
To effectively bring both inflation and inflationary expectations under control in the long run, the
government has to adopt long-term policy measures such as; closing the gap between aggregate
demand and supply. Ethiopian agricultural production and productivity is been hampered by many
variables and to solve problems relating to shortages in long run and curb rising prices the nation has
to transform its agricultural system to a better one. It is true that there is a real need to address
structural problems in the economy.
Finally, at the time of this study the price ceiling had been lifted up partially for some items where it was
deemed that market stabilization had been achieved. This was the view of some of the government officers
interviewed on June 22, 2011.
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REFERENCES
1. Arrow, Kenneth J. (1985), ‘The Potentials and Limits of the Market in Resource Allocation’, in Feiwel,
G.R. (ed.), Issues in Contemporary Microeconomics and Welfare, London, the Macmillan Press, 107124.
2. Abbott, J.C., and J.P. Makeham, 1981. Agricultural Economics and Marketing in the tropic
3. Bator, Francis M. (1958), ‘The Anatomy of Market Failure’, 72 Quarterly Journals of Economics, 351379.
4. Bowers, D.E., W.D. Rasmussen and G.L. Becker (1984) “History of Agricultural Price Support and
Adjustment Programs, 1933 – 1984”, Agricultural Information Bulletin AIB485, Economic Research
Service, US Department of Agriculture, December
5. COMESA (January 2010) report on “Variation in staple food prices, Consequences, and policy options
“, Maputo, Mozambique, 25-26 January 2010.
6. Gardner, Bruce. L. (2002), "U.S. Agriculture in the Twentieth Century". EH.Net Encyclopedia, edited by
Robert Whaples. March 21, 2003. URL http://eh.net/encyclopedia/article/gardner.agriculture.us
7. Relief Web report(2011) — URL http://reliefweb.int/node/106438
8. World Bank (various issues), “Pink Sheets” World Bank Price Indicators, online available at:
http://web.worldbank.org/wbsite/external/extdec/extdecprospects/0,,contentmdk:20268484~menupk:55
6802~pagepk:64165401~pipk:64165026~thesitepk:476883,00.html.
9. Mendoza, G., 1995. A primer on marketing channels and margins. Prices, Products and People:
Analyzing Agricultural Markets in Developing Countries. Lynne Reinner Publishers, Boulder, London.
498p
10. Reports on Price Controls Cause Chaos in Ethiopian Market ( VOA)
11. Food becomes unaffordable in Ethiopia , Associated press , Addis Ababa , Ethiopia, June 22.2011
12. http://en.wikipedia.org/wiki/Price_ceiling
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Appendixes
Interview Schedule
Target group – relevant government officials
1. Why did the Ethiopian government announce a price controlling measure?
2. Does it not contradict with the free market economy (Supply and demand function) policy Ethiopia
follows?
3. What is the significance of this type of market intervention to economy like Ethiopia?
4. Is Ethiopia ready to implement this policy intervention?
5. Was it timely?
6. Were there other supplementary institutional arrangements to implement the measure?
7. Why does the government select only those items in the list of price control?
8. How the price does was determined for those items in the price controls?
9. What are the issues that are important for you in selecting items and location of policy measures, Addis
Ababa?
10. Why the price control was not declared nationwide?
11. What other solutions is the government exploring to contain the continued price soaring?
12. Why the government does not consider other items whose price is increasing higher than those items
in price list?
13. Is /was/ there any means of monitoring and evaluating strategies to check the effectiveness of the
measure?
14. How do you rate the effect of the measure on the business owners and market as whole?
15. Has it achieved the intended purpose of protecting customers’ form high price?
16. What were the unintended consequences of this measure in the market?
17. Very recently customers are saying that government has lifted the measure, is it true?
18. If so, why?
19. If it is lifted up, then can one say it was unsuccessful measure?
Target Group- Customers/suppliers/ retailers
1. Does the price control help you to get items at price listed on the measure?
2. Does the price fixed in the price control really take in to account real cost of materials from your
perspective?
3. How does the price control affect the availability /supply of items in market?
4. Does this measure encourage you to consume/store/purchase more of these items?
5. Have you actually applied the price on the items to sell/ purchase?
6. What was the result of price control on your business?
7. Does the measure affect your customer relationship?
8. If so, in what way, positively or negatively?
9. Does the price control affect quality of items to be bought, or served for customers?
10. Have you noticed any unethical practice on items purchased like reducing amount of kg, liters or quality
deterioration as result of new price fixation?
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