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The Ethics of Pricing

    Caveat emptor!  Let the buyer beware. Such has been the motto of pricing throughout time in free market economies.  Traditionally it is the buyer's responsibility to avoid being ripped off.  Our very language is rife with expressions of this principle.  In early English farmers' markets one was considered a fool to buy a "pig in a poke."  The smart shopper "let the cat out of the bag."  (A "poke" was a canvas sack in which more than one unscrupulous merchant stuffed a cat, intending to pass it off as a piglet.)

    Philosophically, advocates of free market economics have argued that allowing negotiated prices between buyers and sellers resulted in the greatest good for society as a whole.  This argument was most eloquently made by Adam Smith in The Wealth of Nations.  However, Smith lived in a simpler time.  Does that rule hold true today?  And if economically defensible, is it morally defensible?

    In a free market, prices are determined by supply and demand.  During a hurricane flashlight batteries are in short supply and great demand.  Is it ethical to charge three bucks for a flashlight battery?  Should we deny the clever people who watched weather maps a special reward for their foresight in stocking up?  After all, they risked capital, investing in a product that could grow useless on the shelf.

    The issue is both timeless and timely.  As of this writing, the Texas legislature is struggling with this very question.  (By publication the results should be in.)  In the seventies Texas saw the birth of the Texas Consumer Protection and Deceptive Trade Practices Act, referred to affectionately by lawyers as the "DTPA".  Business lobbyists are working the legislature in an effort to delete "unconscionability" as a DTPA violation.  "Unconscionability" in this context means a gross disparity between price paid and value received.  Translation: A ripoff involving no lies except as to value.  Another proposed amendment would redefine "consumer" excluding many businesses from that definition.

    Before you endorse these changes wholeheartedly, consider this:  Let's assume you are an entrepreneur; your business is making it, but you're not yet big.  You contract with a computer programmer to provide you with customized database capability to improve your ability to service customers while controlling costs. Most programmers charge by the hour.  How can you tell if  you're being charged sixty hours for a twenty hour job?  When?  After it's done?  Maybe it's all legit, and your programmer is just slow, compared to the industry average.

    Being a confirmed capitalist, I like free market pricing.  I believe that when the government gets involved in pricing, the people pay.  But there are exceptions.

    If the market is not a free one, all bets are off.  The classic conspiracy in restraint of trade, where sellers get together to fix a price higher than they could possibly get competing, has long been thought unethical.  Did the oil embargo in 1979 result in ethical prices at the gas pump?  But then we create monopolies, awarding patents to protect inventors from the free market.  How long should they last?

    By now it should be obvious that there are at least some ethical restraints on sellers.  But how about buyers?  Caveat venditor!  The blade cuts both ways.

    Was it ethical to buy New York from the Indians for worthless beads?  Should we give New York back?  Or would that be ripping off the Indians a second time?  (Hey editor, remember this is Texas.)  While this example is facetious, the issue is not.

    Is it ethical for the land speculator to buy up properties knowing that an new interstate highway is coming through?  Didn't the sellers have the same opportunity to study highway plans as the buyer?  What if the buyer has inside information from his well placed Washington brother-in-law?  Does the buyer have an ethical obligation to give the seller hidden information that greatly affects value?  Is this different from the seller's ethical obligation to disclose hidden toxic waste contamination to the buyer?

    For a juicier example, should stockbrokers be allowed to make fortunes, buying stocks on inside information of mergers and acquisitions, before it's made public?  Not long ago a bunch of guys went to prison for that.  I guess we consider that one unethical.

    We're not done with pricing yet.  Should sellers be required to make a fair profit on each sale?  It's been found illegal for the Japanese to dump televisions into the U.S. market below cost to increase market share, thereby driving domestic producers under.  But is it unethical?  When a large American corporation does the same thing to a small American entrepreneur, it's generally legal.  But are the ethics different?

    True to the nature of ethics, the pricing issue involves questions that generally have no clear answers. As always, one's feelings may depend on whose ox is being gored.  For the ethical businessperson, the truly successful businessperson, no bovine corpse is acceptable.  Great fortunes can still be made buying and selling at a fair price in a competitive market.

Copyright 1995 Daniel A. Krohn
Previously published in DBA Houston June 1995