Reserve price

In the economy, minimum prices are an instrument of state market regulation , in which a certain price may not be fallen below, but may be exceeded. Minimum prices apply as the state-determined (administered) lower price limit . In contrast are the maximum prices .

General

In free market systems, prices on free markets can fluctuate indefinitely because they are exclusively subject to the market and price mechanisms of supply and demand and free price formation . However, this can lead to market failure , which can also manifest itself in extremely low or extremely high prices. Then economic policy can initially take moral appeals - or in the case of non-compliance by market participants - also exceptionally legal or officially ordered measures through minimum or maximum prices. This is to system-retardant and non-market-based interventions in the market because minimum or maximum prices set free pricing suspended. The introduction of minimum prices serves to protect providers, the setting of maximum prices to protect consumers.

The minimum price also combats a market imbalance in the case of a natural monopoly . With him, the marginal costs fall steadily due to increasing production ( economies of scale ). However, this does not remedy a misallocation of competition policy , but rather a reallocation due to the socio-political equilibrium.

history

The first price regulations go back to the Codex Hammurapi from 1800 BC . Sometimes in the Middle Ages minimum prices were also decreed to protect sellers. Jean Gerson , who teaches in Paris, citing the authorities' insight, demanded that the prices of all goods be fixed. The guilds set minimum prices for goods to prevent voluntary or involuntary selling below their value. Nobody was allowed to undercut these minimum prices. Before 1520, production quotas and minimum prices were set in German iron ore mining.

In the dirigism of socialism or the central administration economy, on the other hand, minimum or maximum prices are inherent to the system and omnipresent. Above all, they are intended to protect consumers , in that the state administratively sets in particular the lower price limit for labor income or the upper price limit for food or household appliances .

functionality

The reason for the introduction of a minimum price is a lack of demand, which leads to an excess of supply. If there is a surplus of supply, the market prices drop so sharply that the companies making the offer fall below their entrepreneurial price floor , can no longer earn their cost prices and may even get into a corporate crisis. As a result, there is a risk that they will leave the market as marginal providers . The low market prices put a strain on the suppliers and favor the buyers. If the bargaining power or market power of certain interest groups (e.g. employees or consumers ) is insufficient, minimum prices can ensure that they are secured. State minimum prices should then help to secure the income of the providers downwards.

Minimum prices are above the equilibrium price , even in the amount of the production costs . This makes it attractive for providers to increase their supply despite falling demand, because the minimum prices mean a state price guarantee. If the minimum price is above the equilibrium price, there is an excess supply (in the amount of ), the supply is higher than the demand. The amount of consumer demand for this price has fallen to. The manufacturers then react by expanding their range . However, consumers still only ask for the quantity . ${\ displaystyle q2-q1}$ ${\ displaystyle q1}$ ${\ displaystyle q2}$ ${\ displaystyle q1}$

species

In monetary policy , the exchange rate ranges for foreign currencies introduced in July 1944 represent minimum or maximum prices that are maintained through the foreign exchange market intervention of the central banks . If a currency reaches the minimum price ("lower intervention point"), the affected central bank must intervene by buying foreign currency .

In the case of overproduction , especially of agricultural products , minimum prices are intended to secure farmers' incomes . Therefore, in January 1962, the EEC Council of Ministers adopted objective principles for creating minimum price systems and for setting these prices (Article 44 of the EEC Treaty). As a flanking measure, intervention stores are often required to take excess supply from the market ( butter mountain ) and thus, for example, stabilize butter prices. State intervention camps, on the other hand, represent subsidization . However, intervention camps provided the incentive for further overproduction because the farmers no longer bore any storage risk . Since March 1983, a government-guaranteed purchase price for milk production has been an important factor . State production quotas such as the milk quota should also curb overproduction. Levies are a kind of customs duty and are levied on imports of certain agricultural products from third countries if the import prices are below the minimum prices applicable in the EU member states . Overproduction can also be countered through export subsidies . Even agricultural protectionism , import quotas or duties may be used to hedge minimum prices.

A significant minimum price is the minimum wage . It is intended to guarantee employees a minimum income if the market situation does not allow this itself. As early as 1928, an “Agreement on the Establishment of Procedures for Setting Minimum Wages” was passed within the framework of the ILO , the importance of which was reaffirmed in 1970. According to this, minimum wages are intended to “grant wage earners protection against inappropriately low wages” and prevent wage dumping . In Germany there has been a minimum wage law since August 2014 , which provides for a cross-sector minimum wage.

The so-called intervention prices of the EU for agricultural products are minimum prices that are guaranteed to farmers by the EU buying up the products concerned through intervention agencies. The intervention price is a minimum price for the producer, with which he can calculate. However, reserve prices can also be the result of a prohibited price cartel . Here, competitors make inadmissible price agreements with one another with the aim of not selling certain products below a minimum price. A vertical price fixing contrary to antitrust law exists if a manufacturer obliges its resellers to only resell the goods it has delivered at the price it has set. Such an agreement violates § 1 GWB and Art. 101 TFEU . Therefore, for example, the company must Almased® the pharmacies prescribe a minimum price for the sale of their products. Price maintenance of this kind leads to a restriction in the freedom of the entrepreneur concerned to set the price - and thus a central competitive parameter - at his own discretion.

Instead of a minimum price, the state can also decide to subsidize the customer. Then he allows the equilibrium price, but he pays the customer a price subsidy for each unit of the good bought. One such price subsidy was the environmental bonus (“scrapping bonus ”) introduced in Germany between January and September 2009 , which ultimately reduced the purchase price of new cars .

consequences

Minimum prices prevent prices from falling to market equilibrium , while maximum prices prevent prices from rising to market equilibrium. The state-guaranteed purchase price is higher than the price that would have arisen with free market forces. With minimum prices it becomes attractive for suppliers to produce even more, although no increase in demand is to be expected. With these excess supply there is a tendency to illegally undershoot the minimum price ( gray market ). The unrequested overproduction causes additional storage costs or destruction costs . Consumers have to pay higher prices because the minimum prices are above the equilibrium price. The introduction of minimum prices leads to falling consumer surplus compared to the market equilibrium, while the producer surplus increases accordingly. In the case of the minimum price, excess production occurs because the state often relieves the providers of the price and storage risk (lower price limit and intervention warehouse), with the buyer having the bargaining power ( buyer's market ). In order to prevent such surplus supply, for example, the state sets production quotas such as the restrictions on cultivation area in agriculture in the USA or the sugar quota for beet sugar in the EU, which was canceled in September 2017 .