Some key ethical issues relating to pricing include price fixing, predatory pricing, deceptive pricing, price discrimination and product dumping.
11.4.1 Price fixing
Competition is one of the driving forces towards lower prices. Therefore, it can be in the interests of producers to agree among themselves not to compete on price.
This is known as the 'act of collusion' and is banned in many countries and regions, including the EU. Article 83 of the Treaty of Rome is designed to ban practices preventing, restricting or distorting competition, except where these
contribute to efficiency without inhibiting consumers' fair share of the benefit.
Groups of companies that planned are said to be acting as a cartel, and these are by no means easy to uncover. One of the European Commission's most famous success stories is the uncovering of an illicit cartel among 23 of Europe's top chemical companies from the UK, France, Germany, Belgium, Italy, Spain, The Netherlands, Finland, Norway and Austria. Through collusion they were able to sustain levels of profitability for low density polyethylene and PVC in the face of severe overcapacity. Quotas were set to limit companies' attempts to gain market share through price competition, and prices were fixed to harmonize the differences between countries in order to discourage customers from shopping around for the cheapest deals. Opponents of price fixing claim that it is unethical because it restrains the consumer's freedom of choice and interferes with each firm's interest in offering high-quality products at the best price. Its proponents argue that, under harsh economic conditions, price fixing is necessary to ensure a fair profit for the industry and to avoid price wars that might lead to bankruptcies and unemployment.
11.4.2 Predatory pricing
Predatory pricing refers to a situation that occurs when a firm reduces its prices with the aim of driving out the competition. The firm is content to incur losses with the intent that high profits will be generated through higher prices once the competition has been eliminated. Budget airline easyJet (www.easyjet.com) has accused British Airways of predatory pricing through its no-frills subsidiary Go;
easyJet claims that the low prices charged by Go are being subsidized by the profits made by BA's other operations.
11.4.3 Deceptive pricing
Deceptive pricing occurs when consumers are misled by the price deals offered by companies. Two examples are misleading price comparisons and 'bait and switch'.
Misleading price comparisons occur when a store sets artificially high prices for a short time so that much lower 'sale' prices can be claimed later. The purpose is to deceive the customer into believing they are being offered bargains. Some countries, such as the UK and Germany, have laws that state the minimum period over which the regular price should have been charged before it can be used as a reference price in a sale. Bait and switch is the practice of advertising a very low price on a product (the bait) to attract customers to a retail outlet. Once in the store the salesperson persuades the customer to buy a higher-priced product (the switch). The customer may be told that the lower priced product is no longer in stock or that it is of inferior quality.
11.4.4 Price discrimination
Price discrimination occurs when a supplier offers a better price for the same product to a buyer, resulting in that buyer gaining an unfair competitive advantage. Price discrimination can be justified when the costs of supplying different customers vary, where the price differences reflect differences in the level of competition, and where different volumes are purchased. Price discrimination can be a particular issue in international marketing where price levels vary across borders and parallel importing ensues. This is where importers
buy products from distributors in one country to sell them to distributors in another country who are not part of the manufacturer's normal distribution channel. A recent contentious case has been that between Tesco (www.tesco.com) and Levi Strauss (www.levis.com), which has been before the European court.
Tesco claimed to be within its rights when it bought cheap, though genuine, Levi's products from countries outside the European Union for sale in its stores. Levi's countered that, as it is owner of the trademark, this practice amounted to breaking the law.
11.4.5 Product dumping
Product dumping involves products being exported at a much lower price than that charged in the domestic market, sometimes below the cost of production.
Products are 'dumped' for a variety of reasons. First, unsold stocks may be exported at a low price rather than risk lowering prices in the home market.
Second, products may be manufactured for sale overseas at low prices to fill otherwise unused production capacity. Finally, products that are regarded as unsafe at home may be dumped in countries that do not have such stringent safety rules. For example, the US Consumer Product Safety Commission ruled that three-wheeled cycles were dangerous. Many companies responded by selling their inventories at low prices in other countries.