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The CC: Market leaders are responsible for ensuring fair competition on the market

(23.03.2017.)

Having assessed the existing situation on the market, after public announcements made at the end of the last year on possible price increase for dairy products, the Competition Council of Latvia (the CC) concludes – the price increase for procurement of raw milk was temporary in the second half of 2016 and, most likely, it has stopped. At the same time, the CC repeatedly indicates to the responsibility of market leaders, when making public announcements on possible price changes, which may serve as a signal for groundless price increase also for other participants in the sector.

In order to identify the validity of public information about the increase of raw milk prices and, accordingly, possible significant increase of milk and dairy products prices in 2017, the CC had a meeting with several representatives of dairy sector. The CC obtained information about the tendencies of price increase and activities of separate companies, which allowed to draw conclusions about processes on the raw milk production market and their indirect impact on the processing and retail sales markets.

By assessing the acquired information, the CC considers, that the price increase for raw milk in the second half of 2016 was affected by a combination of several factors; however, it was not related to significant increase of demand in this period. No significant changes can be observed in the previous year, compared to 2015, which may influence the raw milk procurement price in a long-term perspective. The CC also observed, that the largest amount of raw milk is exported to Lithuania and Poland constantly and in the course of several years.

According to official statistical data, the raw milk procurement price increased by approximately 60% in the period from July to December of the last year. During the investigation, representatives of the sector indicated, that the price increase may be related to the fact, that foreign intermediary purchasers of raw milk, for example, in Poland offer higher prices to Latvian farmers. However, the CC did not find a confirmation, that intermediary purchasers could directly influence the raw milk prices in Latvia to such an extent, that the prices in Latvia would have an economically justified reason for long term increase, which continues also in this year.

At the same time, the CC identifies signs that procurement prices have increased significantly only for some farmers; therefore, also the increase of wholesale prices of dairy products of raw milk processors is only partially substantiated. Therefore, the CC does not exclude the situation, that announcements about price increase and its substantiation do not correspond to the actual situation and the publicly announced information about increase of raw milk procurement price has served as an argument to raise mark-up artificially and, accordingly, also profit for own products in the supply chain of milk and dairy products up to the store shelf.

Despite some market participants indicating, that the public announcements are aimed for informing consumers, the CC did not detect, that publishing of such information give benefits to consumers in opposite to the situation, if such information would not be publicly available. Moreover, it is questionable, whether consumers are able to react efficiently to the price increase, for example, by reducing demand, as it is observed in the case of price increase.

As a result, the CC repeatedly draws attention to impact of public announcements on competition. By publicly announcing information about price changes, large market players can significantly influence the conduct of competitors, facilitate their adaptation and help them to make a decision on increasing of prices to a much greater extent, than it is planned initially. Such conduct has similar impact as direct coordination of prices – prices are increased artificially, which results in consumers having to overpay for products and services without any economic substantiation.