ETHICS IN PRICING

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INTRODUCTION

In today's environment, every business must be as competitive as possible in order to gain new customers and keep their existing customers. Some are choosing to offer more value than ever before to their customers, and some choose to benefit themselves rather than their customers when consumers have a hard time differentiating them from their competitors. Brings up the ethics of pricing

ETHICAL PRICING STRATEGY

A business operating in today's competitive environment might be tempted to try a variety of unethical pricing strategies to increase market share and profits.

Pricing Ethics

Pricing ethics involves examining what constraints are needed on the pursuit of market share and profits when the actions of a company affect others adversely.

Examples of Unethical Pricing Strategies

Price gouging is an example of an unethical pricing strategy. A company may raise prices of items that are temporarily in high demand. This is sometimes seen in the wake of emergency situations when the price of plywood jumps after a flood, even though there is enough plywood to repair houses.

High Pressure Pricing Strategies

Vulnerable consumer groups sometimes take the brunt of unethical pricing strategies.

Developing an Ethical Pricing Strategy

Companies issue statements of ethical practice in regard to their dealings with customers. This includes pricing and should include statements about when the company can raise prices and by how much

PRICING STRATEGY ETHICS ISSUES

Pricing: More ethics than legality

There is a general consensus that marketing strategies must not infringe on values like honesty, transparency, and autonomy. As such, the main crux of pricing ethics concerns the establishment of a balance of power (through information) between the producer and the consumer.

1. Price fixing: Collusion at its worse

Price fixing involves the an agreement between a group of people on the same side of a market to buy or sell a good or service at a fixed price. Typically, competition between these participants for consumers drives down prices for goods.

Bid rigging: Favoritism

This

practice hurts consumers considerably, because the best producer doesnt receive the work necessarily.

Even if you know a guy keep the bidding process honest on both sides. Everyone will end up better off.

Price discrimination: Anti-favoritism

Price discrimination is the strategy of selling the same product at different prices to different groups of consumers, usually based on the maximum they are willing to pay.

Price skimming: Discriminating through time

Price skimming is when the price for a product is first sold at a very high price and then gradually lowered.

This strategy is most commonly seen in the tech industry, as some consumers are willing to pay a premium price for the newest gadgets. Apple is a prime example, as prices drop within months of a release and new iterations happen within six to 12 months. Find ways to lower prices to new tranches of customers discreetly.

Supra competitive pricing: Monopoly gouging

Sometimes the value that consumers place on a good is much greater than the cost of producing that good. In such cases, there is controversy about whether the corporation is justified in charging a much higher price and matches the perceived value. This is a common sense scenario, but a good litmus is to ask yourself if the pricing change hinders an individuals necessities.

ETHICS OF PRICING PRACTICES

Companies have a whole range of techniques to set, or shall we say, manipulate prices. Some may verge on fraud or anti-competitive practices whilst other techniques will seek to exploit opportunities in the market place.

Trust - or lack of it

Any company that engages in fraud, bribery, predatory pricing etc. is hopefully going to get discovered. And if the regulator s fines don t bankrupt them, then lose of customers trust probably will. In the UK, there are companies such as the Co-op, The Body Shop and Fair Trade. These companies are building solid businesses based on trust and fair dealing.

Life's a Continuum

The fair trade movement does give more to the growers but everyone else along the supply chain seems to take their (unfair?) cut of the much higher retail prices. Giving deep discounts provides customer benefits, but it can also put competitors out of business.

Upside Down Thinking

The widening use of information technology is providing business with new opportunities for changing their pricing practices. YM, airlines offer extremely discounted prices to early bookers. Then as demand rises and the plane becomes full the ticket price rises. Many companies now offer discounted prices for internet purchases, or conversely, a surcharge for telephone and postal purchases. Banks and savings institutes similarly offer higher interest rates to internet based customers.

Own Unique [High/Low] Price

Just this month (Oct. 04) dabs.com stopped its loyalty points scheme and said they would offer lower prices by dynamically changing prices so they were the most competitive. Uncontrolled, one can imagine retailer s computer systems automatically fighting each other to the bitter death of zero profits!

War & Peace

Other contentious pricing practices include immediately hiking pricing when there are world events (think crude oil and war, despite there being millions of litres of fuel in the supply chain).

UNETHICAL SALES PRACTICES THAT DAMAGE A BRAND AND LEAD TO UNFAITHFUL CUSTOMERS

Making promises and commitments to customers that your product development team cannot fulfill. Misrepresenting promotions or products to close a deal with a prospective customer or up-sell a current customer. Leaving customers in the dark about promotion or pricing changes. Skipping contract commitment disclosures. Customers hate to be caught off-guard and be tied to commitments that are contained in the fine print of a deal. Making sales final before a customer has had ample time to try-out a product.

By establishing reasonable customer expectations, being transparent about contractual issues and allowing customers to test-out products during a trial period or offering a 15 to 30 day refund policy, your sales team will weed out bad customers and set your customer management and product management teams up for success in building longlasting customer relationships

ETHICAL ISSUES RAISED BY DUAL PRICING

Insurers have been in the spotlight recently in connection with dual pricing. This is when the same risk is priced differently for new customers and existing customers. Firstly, dual pricing relies on information asymmetry between insurer and consumer: in other words, existing customers not knowing a) how the price for their policy was arrived at and b) what other customers are being charged for a comparable risk. Clearly, it can sometimes be a challenge to achieve pricing consistency across an insurers full range of brands, products and distribution channels, so some pricing variations are to be expected.

The second point thats worth highlighting is the knock on effect dual pricing could have on trust in the insurance sector and the perceived value of what is being sold. As a promise to pay, insurance relies a great deal upon the trust consumers have in the sector. To succeed, they will need to get their messaging much more consistent.

KEY ETHICAL ISSUES IN B2B PRICING

Price fixing

principal ethical issues that arise in B2B pricing decisions are anti-competitive pricing, price fixing, price discrimination, and predatory pricing or dumping.

Collusive tendering

collusive tendering, which occurs where there is an exclusive agreement between competitors either not to tender, or to tender in such a manner as not to be competitive with one of the other tenderers.'

CASE STUDIES OF UNETHICAL ISSUES IN PRICING

Case 1:

Fuel Pricing In India

Demand for the petroleum products is on an expected rise in the country. Considering this socio-economic ramifications, the government has been substantially involved in the pricing and supply of these petroleum products. Country has to depend a lot on the imports of these products. The current import prices for India is 5.27$ per gallon as opposed to 3.27$ for USA Governments responsibility to provide Middle Class section of the country with cooking fuel in subsidized prices as it cannot be afforded by them.

Judgment:

Key Recommendations from the Parikh Committee:

Domestic petroleum product prices have to reflect that of international prices. The government should allow pass-through of international oil prices to domestic users. This will enable the public sector OMCs and upstream oil companies to remain financially stable and solvent.

Conclusion:

The committee suggested that LPG and kerosene prices could be raised every year in step with the growth in per capital agricultural GDP at nominal rates and per capita income respectively. Freeing petrol and diesel prices would not only promote competition but also lead to more equitable sharing of inflation burden, affecting mostly people who can pay.

Case 2

IPL BID RIGGING

IPL planned to increase the franchise teams from 8 to 10 for IPL 4, 2011. The runaway success story of IPL had made Indian Cricket Story an incredible one. IPL has unveiled a new business segment in the Indian soil. IPL first season started with 8 franchise teams and the base price was at USD 50 million each. But, IPL aimed high with its 2 new teams and has proposed strict bid rules. Each new IPL team is base priced at USD 225 million (~ Rs. 1040 crores ). Bidder networth should be over $1 Billion (~ Rs. 4500 crores). Also, interested parties should submit a bank guarantee of Rs. 460 crores to participate in the bidding process.

CASE:

The entire case started soon after Rendezvous Sports World (RSW) won the Kochi IPL team 10 year rights for $333.33 Million, Lalit Modi, Commissioner of IPL expressed his doubt on share holding pattern of the Kochi IPL Team Owners RSW which he made public in his tweet.

Conclusion:

This is a classic example of complications in restrictive trade practices issues and corporate dispute. Bone of contention chiefly revolves around the issues of bid rigging on one side and issue of sweat equity shares flouting the provisions of Companies Act and Sweat Equity Rules, on the other side. Closer scrutiny by Central Government and Competition Commission are essential so as to bring the complicated issues at rest.

Case 3

HOARDING & MANIPULATION TO PUSH UP SUGAR PRICES DURING JANUARY 2010

During January 2010, the retail prices of Sugar reached Rs. 50 per kg. & was expected to rise further because of Holi where the demands of sweet would increase thereby increasing the demand of sugar. So the sugar price was expected to reach Rs.60 just before the festival of Holi. This price hike was a result of HOARDING of sugar by the various wholesalers & retailers. Some other factors contributing to this price hike was bulk purchase by industry & MANIPULATION of market sentiments by the private mills.

THE ESSENTIAL COMMODITIES ACT (ECA), 1955:

The Essential Commodities Act, 1955 was enacted to ensure the easy availability of essential commodities to consumers and to protect them from exploitation by unscrupulous traders.

THE PREVENTION OF BLACK-MARKETING AND MAINTENANCE OF SUPPLIES OF ESSENTIAL COMMODITIES ACT:

The Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities Act, 1980 is being implemented by the State Governments/UT Administrations for the prevention of unethical trade practices like hoarding and black-marketing. The Act empowers the Central and State Governments to detain persons whose activities are found to be prejudicial to the maintenance of supplies of commodities essential to the community.

Case 4

Dumping of Sport Shoes in India by China

The authority considered imposing an amount of duty equal to the level of dumping to remove the unfair advantage to the Chinese exporters while keeping the level of competition in the domestic market the same. Hence, they imposed the anti-dumping duty such that, the minimum price charged for unbranded and low end branded shoes will be 6.277$ per pair, and that for the branded category which includes Nike, Reebok and Adidas will be 18.44$ per pair. Thus, the anti-dumping duty will be the difference between the import price and the minimum selling price as given above. Thus, the unfair edge gained by the Chinese exporters was eliminated, and the competitiveness of the markets was also sustained. There was no restriction on imports of shoes from China, which did not affect the availability of goods for the consumers.

CONCLUSION

A series of major financial scandals involving Enron, Tyco International, HealthSouth, Adelphia Communications, WorldCom, Global Crossing, Rite Aid, and other companies have raised deep concerns about ethics in business

Pricing ethics involves examining what constraints are needed on the pursuit of market share and profits when the actions of a company affect others adversely.

A company may raise prices of items that are temporarily in high demand. The potential blow to consumers is why horizontal price fixing is illegal, which means corporations on the same level of the supply chain cannot agree on a target, maximum, or minimum price Sometimes the value that consumers place on a good is much greater than the cost of producing that good. In such cases, there is controversy about whether the corporation is justified in charging a much higher price and matches the perceived value

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