Competition and Purchasing Power in Times of Inflation

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In August 2022, the Autoridade da Concorrência (AdC) published a paper emphasizing the role competition can play in maintaining the purchasing power of households, as consumers, workers, and taxpayers, in times of inflation. The paper provides a list of 15 key messages on the role of competition in inflationary contexts, to relevant stakeholders such as the government and other policy makers. The paper sets the context for inflation and argues that while competition policy is not intended to address surging inflation in the short run, it can have a key role in achieving a more sustainable economic recovery at a lower cost. Competitive markets lead to lower prices via a downward pressure on profit margins and on costs and a more competitive economy tends to adjust more swiftly to unanticipated shocks. The paper notes the benefits of eliminating unnecessary barriers to entry and expansion, as well as reducing switching and search costs. With this initiative, the AdC reiterates a number of recommendations it made in the last years to remove unnecessary barriers to entry across different sectors of the economy, namely in FinTech, transport sectors and energy markets. It is also key to focus on competition enforcement, through merger control and the investigation of anticompetitive practices, to keep markets competitive. In particular, fighting cartels in public tenders contribute to avoid waste of public funds, which could further burden households. The paper also highlights that firms should set their prices and strategies in the market autonomously (in relation to its competitors) and that temporary disruption of supply chains or any form of public announcement of prices should not be used to disguise an anticompetitive practice. Lastly, the paper notes that there is a greater propensity for governments to implement administrative price controls in contexts of inflation. In this regard, the AdC underlines the risks that such measures may bring to competition, as price controls distort price signals in the market and may unintentionally lead to supply shortages and disruptions in the value chain. The potential risks of imposing price caps in terms of impact on competition should be assessed, as well as the existence of alternative policies that may achieve the same objective.