An administered price is a price that is set or influenced by a regulatory authority or a dominant market participant, rather than being solely determined by the forces of supply and demand in a competitive market. In some cases, administered prices are used to maintain stability, protect consumers, or support specific industries or social goals.
For example, a government may set the price of certain essential goods or services, such as public transportation fares, utilities (like water and electricity), or basic food items, to ensure affordability and accessibility for its citizens. Similarly, a government may impose price controls on pharmaceutical products to make essential medications more affordable for the general population.
Administered prices can also be found in industries where a single or a few dominant companies have significant control over the market, and they can set the prices for their products or services. This situation can arise in industries with high barriers to entry or where economies of scale make it difficult for new competitors to enter the market. In such cases, regulatory authorities may step in to prevent price gouging or anticompetitive behavior.
Example of an Administered Price
Let’s take the example of a government regulating the price of electricity in the country.
Suppose the government of a country wants to ensure that electricity is affordable for all citizens, including low-income households. The government sets up a regulatory authority responsible for determining the price of electricity for consumers. This authority takes into account the cost of generating electricity, the required investments in infrastructure, and a fair return for the electricity producers, while also considering the affordability aspect for consumers.
In this case, the electricity price is an administered price, as it is determined by the regulatory authority rather than solely by the forces of supply and demand in a competitive market. This price setting helps to achieve the government’s goal of providing affordable electricity to all citizens and promoting a stable energy market.