Countries could learn from Greece's mark-up deregulation, says Imperial report

European Union (EU) countries could learn lessons from Greece's mark-up deregulation policy, according to a new discussion paper.

Maximum mark-up regulations are Government laws that explicitly set the maximum margins for wholesalers and retailers in a market. The aim of the policy is to protect consumers from extreme prices and it is widely applied in pharmaceuticals across the world, alcoholic beverages in the US and the petrol market in various European and other countries.

In June 2011, the Greek government cancelled their mark-up regulations on fresh fruits and vegetables allowing wholesalers and retailers to set prices on their products without constraints.   This change was part of a larger effort by the Government to establish product market reforms aimed at improving the Greek economy, which was deeply affected by the global recession. 

Researchers from Imperial College Business School, as part of an international team, carried out an in-depth analysis trying to understand whether maximum mark-ups were actually beneficial to consumers. They looked at the retail and wholesale prices of fruits and vegetables that were subject to this regulation and compared them to other similar products before and after the change in policy.  The team found that abolishing mark-ups led to a significant cut in wholesale prices of previously “protected” products and as a result retail prices also went down. The researchers suggest that mandated mark-ups enabled wholesalers to set their prices very close to the maximum allowed margin.  Once this policy was removed wholesalers were no longer constrained by the mark-up policy and this encouraged further competition.

Pantelis Koutroumpis, co-author of the report and Research Fellow at the Innovation and Entrepreneurship Group, said: “Maximum mark-ups are designed to prevent excessive charges for products and assumes that consumers get a fair price when purchasing goods as a result. Although this policy was enacted by the Greek Government more than sixty years ago, it has never been tested to see if it really promotes healthy competition between businesses.  Our research shows that these interventions had the opposite effect and lead wholesalers to set prices very close to the maximum allowed margin. This meant that there was very little competition and customers in Greece paid a higher price for their fruit and vegetables. Once the mark-up regulations were removed prices for customers dropped as wholesalers lost their reference mark-up. Our analysis can be used by policymakers in EU countries, where mark-up regulations exist, to review whether these ensure that prices for goods and services are as low as possible for consumers.”

The researchers found that net effect of this change was a six to nine percent drop in the prices of fruit and vegetables corresponding to a suggested combined yearly saving for Greek citizens of €256 million.

The researchers used three different types of datasets over a three-year period to form their conclusions.  These included weekly retail prices for fruit and vegetables from supermarkets and street markets in Greece, monthly wholesale fruit and vegetable prices from Athens Central Wholesale Market and weekly store-specific retail prices for other products sold in supermarkets during the same period to test if their hypothesis also applied to non-fruit and vegetable goods.

The researchers’ say the findings in their study are aligned with previous studies on credit card price ceilings in the US, which showed that customers paid more for their purchases on their credit cards, when a maximum credit card interest rate was in place.  Once this was removed it led to more competition and consumers got a better deal as there were cheaper options available to them.

The research was also carried out by the Athens University of Economics and Business and the University of Turin.