Competition should be about innovation and quality, not the price

South China Morning Post

2 days ago

As Beijing works aggressively to make sure the economy meets the 5 per cent growth target at year end, one new tool in its arsenal is to amend a key law to discourage vicious price wars that have plagued multiple sectors in recent years. From food delivery and e-commerce to solar power and electric cars, steep price cuts – with the aim to drive out competitors but which also undercut one's own profits – are fuelling deflationary pressure. That has led regulators to propose urgent amendments to an old pricing law. A public consultation is open until August 23. With transparency and an open mind, the authorities can use positive public feedback to fine-tune the changes.
In the existing law, firms are banned from selling goods below cost to eliminate competitors or monopolise the market. The new amendment adds the condition that businesses cannot fight each other by dumping products at below-cost prices.
With more transparent price regulation and oversight, they will also be prohibited from 'leveraging data, algorithms and technological tools' to chase clients and beat rivals. So far, market reactions have been positive. Listed companies in consumer services, non-ferrous metals and financial companies – sectors that have experienced cutthroat competition or what officials have termed 'involution' – have seen share prices move up since the news broke.
There is, of course, a counterargument that market forces alone should decide prices. But in such cases of market failure, supervision and regulatory intervention are called for. Companies ought to compete on quality and innovation rather than price. A proper legal framework will work better to guide businesses and promote healthy competition, rather than for authorities to deliver ad hoc admonitions to offending firms when the situation has already become dire.
In early July, the Ministry of Industry and Information Technology warned 14 major solar firms against a vicious price war and overcapacity. The share prices of some of them rose on the news, as markets expected price cutting eating into profits would stop. But such intervention is unsystematic. A transparent legal framework should be business-friendly with clear rules and regulations.
Moderating or even eliminating involution will allow more time for companies to phase out outdated practices to better compete.