Opinion | Price controls can do more harm than good

The government is thinking of bringing essential products such as sanitary napkins and hand wash agents under its price control regime, say reports. The objective would presumably be to make such products affordable to people at large, so that basic hygiene standards are upheld and nobody’s health suffers. This is a noble cause, but the method that has been suggested to achieve the aim is not appropriate. Put simply, a price cap imposed on a product can make it unremunerative for its manufacturers to sell, leaving them with no choice but to pull out of the market. An example of this is visible in the Indian market for coronary stents used in heart surgeries. Some makers of specialized and other premium stents have withdrawn their offerings in response to a state-ordered price ceiling. Selling these at lower rates, they say, does not make commercial sense for them. As a result, according to various surgeons, patients in need of superior stents are forced to make do with cheaper alternatives that risk exposing them to health complications.

Many healthcare products such as pharmaceutical drugs require years of research and millions of dollars to develop. Large sums of money need to be invested in their development, though there is always the risk of a new medicine failing to pass human trials. As an incentive to keep at it, such firms are granted patents for their formulations that let them charge high “monopoly” prices if and when they are launched. The actual cost of making drugs, however, is typically only a tiny fraction of the retail price. So, once the initials costs have been recovered over the span of some years, these tend to yield bumper profits. If these happen to be life-saving pills, then a government would be justified in capping their prices in the public interest. So long as their cost of production is lower than the price caps—which is usually the case—companies would keep selling them.

What Indian pricing policy needs is clarity on outcomes. Ensuring the cheap availability of old but essential drugs is easily done without any adverse consequences for public health. However, if the role of pricing products is taken away from companies in markets with vastly differing dynamics, the results could be poor. Take the case of sanitary pads. They sell in varying grades of quality, offering women with varied budgets a range of options. The market for these products is not short of competition. The rivalry of companies trying to outdo one another on sales is enough to guarantee that no single brand can get away with charging too much. When there is demand for cheaper variants, a new entrant would fulfil it, which would push existing brands to contain costs and reduce prices. In such a scenario, an arbitrary maximum retail price set by the government would distort the market by turning innovative products that use expensive input materials unprofitable. Should premium choices vanish, it would spell a net welfare loss for Indians. As for the poor who find even the cheapest available sanitary pads unaffordable, the government could intervene in other ways. It could use public funds to subsidize low-cost napkins for mass distribution, for example. In general, it is best to rely on market forces to have people’s needs met. The government’s heart may be in the right place, but price caps in open markets are likely to do more harm than good.