Profit-push Inflation

Profit push inflation

Profit-push inflation is when there is too much concentration of market power. When there is too much market power by one firm or group or firms, prices will rise. During periods of rising costs, monopolies raise the prices of their goods by an amount that is far more than what is required to offset the increase in the cost of production.

Solutions

Our short run policy would be the implement price controls such as marginal-cost-pricing and average cost pricing.

Our long run policy would be to control market power by adopting legislative measures to prevent to prevent and curb the growing market power of firms. This is followed by the process of deregulation which helps to increase the level of competition in the market.

For example, our government introduced the Competition Act in 2004 which led to the creation of the Competition Commission. This commission primary task is to ensure that the firms are not engaging in anti-competitive behaviour that would eventually lead to rising prices. Also, industries producing essential services that are associated with "natural monopoly" are being regulated by the government. For example, the public transport sector is regulated by the LTA by the PTC (Public Transport Council). Such regulation balances between the profit incentives that make these industries efficient as well as the costs of living and buisness costs.

Deregulation is a pro-competition policy that allows for more players into a particular sector of the economy. For example, in 1997, M1 and Starhub entered the telecommunications sector to provide competition with the incumbent monopoly SingTel. Deregulation encourages more competition in the supply of goods and services. If the government can more competition, this should have the effect of increasing national output and reducing cost-push inflation. Increased competition can lead to increased efficiency, more consumer choice and lower prices. Firms will find more incentives to cut costs in their pursuit of profit maximization.

Although deregulation may lower costs through the introduction of competition, this may come at the expense of the quality of the goods and services unless closely mentioned.