What Is Administered Price?
An administered price is a price of a good or service that is determined by an entity other than the conventional forces of supply and demand in a competitive market. Instead, it is set by a centralized authority, typically a government, a regulatory body, or a dominant firm with significant market power (like a monopoly or oligopoly). This concept falls under the broader field of economic policy and industrial organization, differing fundamentally from how prices are established through free market interactions. Administered prices often reflect strategic decisions related to costs, social welfare, or market stability rather than pure market equilibrium.
History and Origin
The concept of administered prices gained prominence with the work of institutional economists Gardiner C. Means and Adolf A. Berle. In their seminal 1932 book, The Modern Corporation and Private Property, they argued that in industries dominated by large corporations, prices were not solely determined by flexible market forces but were instead "administered" by corporate managers based on internal policies and costs, leading to price rigidity7. This contrasts with the classical economic view where prices fluctuate readily with changes in demand and supply. Means further developed this "administered-price thesis" in 1934–35, observing that during economic downturns, these prices tended not to fall as much as traditional market prices, with the recession's impact manifesting more as a reduction in sales and production.
6## Key Takeaways
- Administered prices are set by authorities (government, regulators, dominant firms) rather than determined purely by competitive market forces.
- They are common in regulated industries, essential services, and markets with limited competition.
- The primary objectives often include ensuring affordability, stabilizing prices, or achieving social welfare goals.
- Criticisms include potential for market distortions, inefficiencies, and the creation of shortages or surpluses.
- Unlike price discovery in free markets, administered prices bypass real-time supply and demand signals.
Interpreting the Administered Price
Interpreting an administered price involves understanding the underlying goals of the entity that set it, rather than solely analyzing traditional market dynamics. For instance, if a government sets a maximum administered price for an essential commodity, the intent is often to ensure affordability and access for the population, especially for basic goods or utilities. Similarly, in an oligopoly, firms might administer prices to maintain market share or avoid destructive price wars, often using cost-plus pricing models. The level of an administered price can signal the perceived value or social importance of a good or service, or the market power held by the entity controlling it.
Hypothetical Example
Consider a hypothetical country, "Econoland," where the government decides to ensure affordable public transportation. To achieve this, it implements an administered price for bus fares.
- Objective: The Ministry of Transport's objective is to make bus travel accessible to all citizens, regardless of income.
- Calculation (simplified): Instead of letting bus companies charge what the market would bear, the government calculates the average cost of operating a bus service (fuel, maintenance, driver wages) and then sets a fare that is significantly lower than this average cost, say $1 per ride.
- Subsidy: To cover the difference between the administered price ($1) and the actual cost per ride (e.g., $2.50), the government provides a subsidy of $1.50 per ride to the bus companies.
- Impact: Passengers pay a low, stable fare, making public transport highly affordable. Bus companies receive enough revenue (fare + subsidy) to operate. This administered price helps achieve a social objective, even though the price does not reflect the full market cost.
Practical Applications
Administered prices are prevalent across various sectors globally, particularly where governments or powerful entities aim to influence economic outcomes.
- Utilities: Prices for essential services like electricity, water, and natural gas are frequently administered by government regulatory bodies to ensure public access and prevent price gouging by natural monopolies. This ensures these services remain affordable for all citizens.
*5 Healthcare and Pharmaceuticals: Many governments administer prices for prescription drugs or medical services, especially in national healthcare systems, to control costs and ensure accessibility.
*4 Agriculture: Through mechanisms like minimum support prices or commodity boards, governments can administer prices for agricultural products to stabilize farmer incomes and ensure food security. - International Trade: Governments use tariffs or import quotas, which effectively administer the price of imported goods, influencing domestic competition and protecting local industries.
- Monopolistic/Oligopolistic Markets: In industries with few players, firms may engage in administered pricing to avoid intense competition, maintain stable profits, or deter new entrants. For example, some studies suggest that prices in certain highly concentrated industries behave more like administered prices than purely market-driven ones. A3 notable instance of regulatory intervention concerning pricing in concentrated markets is the European Union's "Roam Like at Home" regulation, which administered maximum roaming charges for mobile phone users within the EU to foster a single digital market.
2## Limitations and Criticisms
While administered prices can serve important social or economic stability goals, they are subject to significant limitations and criticisms. A primary concern is their potential to distort market signals, leading to inefficiencies. When prices are not allowed to fluctuate freely based on supply and demand, they may not accurately reflect the true cost of production or the real preferences of consumers.
- Inefficiencies and Shortages: Setting a price below the market equilibrium can lead to shortages, as producers are unwilling or unable to supply enough at the artificially low price, and demand increases due to the affordability. This phenomenon was observed in centrally planned economies, where pervasive administered prices often resulted in chronic scarcity of goods. A classic economic argument suggests that such price controls can inhibit production and lead to unmet demand.
*1 Black Markets: In situations of severe shortages caused by administered prices, informal or illegal "black markets" can emerge, where goods are sold at prices reflecting their true market value, often significantly higher than the administered rate. - Reduced Innovation: Without the incentive of competitive pricing, firms in administered price environments may have less motivation to innovate, improve efficiency, or respond dynamically to consumer needs.
- Resource Misallocation: Administered prices can lead to a misallocation of resources across an economy. Industries with artificially low prices might receive insufficient investment, while those with artificially high prices might attract excessive resources.
- Inflationary Pressures: While sometimes intended to control inflation, administered prices can also contribute to it if they are set too high or adjusted without regard for underlying economic realities. Critics argue they can also lead to inflationary tendencies by failing to lower prices in response to cost reductions or by increasing prices to maintain profit margins.
Administered Price vs. Market Price
The fundamental difference between an administered price and a market price lies in their determination.
Feature | Administered Price | Market Price |
---|---|---|
Determination | Set by a central authority (government, regulator, dominant firm). | Determined by the interaction of supply and demand in a competitive market. |
Flexibility | Tends to be rigid or sticky; changes infrequently and by decree. | Highly flexible; fluctuates constantly in response to market conditions. |
Objective | Social welfare, stability, profit maintenance, or market control. | Price discovery reflecting efficiency and resource allocation. |
Transparency | Often transparent and publicly declared. | May or may not be immediately transparent, depending on the market structure. |
Market Signals | Can obscure true market signals and lead to distortions. | Serves as a key signal for producers and consumers to allocate resources. |
Confusion often arises because both types of prices exist within modern mixed economies. While market prices are the norm for most goods and services, administered prices are specifically applied where there's a perceived market failure, a desire for social equity, or in sectors where competition is limited, such as in public utilities.
FAQs
What are common examples of administered prices?
Common examples include government-set prices for public utilities like electricity and water, rent controls in certain cities, minimum wages, prices for essential pharmaceuticals, and sometimes agricultural commodity prices established by government boards or regulations.
Why do governments implement administered prices?
Governments implement administered prices primarily to achieve specific economic policy or social objectives. This can include ensuring affordability of essential goods and services, stabilizing markets, controlling inflation, supporting specific industries (like agriculture through subsidies), or preventing exploitation in markets with limited competition.
Can administered prices change over time?
Yes, administered prices can and often do change over time. Regulatory bodies and governments typically adjust them periodically in response to factors such as changes in production costs, overall inflation rates, shifts in government policy objectives, or public pressure. These adjustments aim to balance the goals of affordability for consumers with the financial viability of providers.
Are administered prices always undesirable?
Not necessarily. While they can lead to market distortions and inefficiencies, administered prices are often implemented to address significant market failure or achieve critical social goals that a pure free market might not deliver. For instance, regulating the price of life-saving drugs or ensuring access to clean water at an affordable rate can be seen as beneficial, despite potential economic drawbacks. The debate often centers on the specific context and the balance between market efficiency and broader societal objectives.
How do antitrust laws relate to administered prices?
Antitrust laws are designed to promote competition and prevent monopolistic practices. In the context of administered prices, antitrust authorities might scrutinize situations where dominant firms or oligopolies appear to be "administering" prices in a way that stifles competition, harms consumers, or leads to collusive behavior rather than a natural market outcome. Their goal is often to ensure that markets remain competitive, thereby reducing the need for direct price administration by external authorities.