WHAT ARE THE ETHICAL ISSUES IN PRICING?
CHRISTINE NYANDAT
26 Oct, 2013
Definition: 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. For
example, a company that has a monopoly on a particular product with few, if any, directs
competitor’s needs to think carefully about raising prices if the price change can not be
justified. Justification may be an increase in labor or material costs that can be
demonstrated clearly to customers.
In other words: Ethical issues in business include concerns of quality, value and honesty as
well as the category of corporate responsibility. In addition to proper treatment of all
workers, business ethics basically boil down to being honest about what products and
services are in relation to their origin and price.
Why is it important? The price of a product or service plays a large part in how well it
sells. Producers and retailers practice ethical pricing strategies to earn profits without
defrauding competitors or consumers. Despite that, competitor's prices, convenience,
availability and other factors affect consumer impressions of fair pricing. Business laws
protect competitors and consumers from many unethical pricing strategies that
unscrupulous marketers may wish to attempt.
Lecture notes
Pricing Ethics
Bid rigging is a form of fraud in which a commercial contract is promised to one party,
although for the sake of appearance several other parties also present a bid.
Predatory pricing is the practice of selling a product or service at a very low price, intending
to drive competitors out of the market, or create barriers to entry for potential new
competitors.
Using Ethics as a Marketing Tactic
Major corporations fear the damage to their image associated with press revelations of
unethical practices. Marketers have been quick to perceive the market's preference for
ethical companies, often moving faster to take advantage of this shift in consumer taste.
This results in the propagation of ethics itself as a selling point or a component of a
corporate image.
Marketing ethics, regardless of the product offered or the market targeted, sets the
guidelines for which good marketing is practiced. To market ethically and effectively one
should be reminded that all marketing decisions and efforts are necessary to meet and suit
the needs of customers, suppliers, and business partners. The mindset of many companies is
that they are concerned for the population and the environment in which they due business.
They feel that they have a social responsibility to people, places and things in their sphere of
influence.
Price fixing
The principal ethical issues that arise in B2B pricing decisions are anti-competitive pricing,
price fixing, price discrimination, and predatory pricing or dumping. For starters, anticompetitive pricing arises where a group of producers collude to raise prices above the level
that would apply in a freely operating market.
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 ’ You may only have to look around to find the malaise in the construction and
defense sectors, as also in a wide range government procurement arrangements. The
essence of collusion in tendering is that there is an agreement between the bidders to win
the contract for one bidder, with the other parties receiving some other benefits, in the form
of financial benefits or agreements that they will win future contracts. “Collusion aims to
undermine the rationale for competitive tendering by avoiding direct price competition
between the bidders. In commercial contracts this means that the buyer is disadvantaged by
paying more than they otherwise would, while in government contracts the ultimate loser is
Business Administration > Introduction to Marketing > Pricing
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WHAT ARE THE ETHICAL ISSUES IN PRICING?
CHRISTINE NYANDAT
26 Oct, 2013
the taxpayer.”
The main crux of pricing ethics concerns the establishment of a balance of power (through
information) between the producer and the consumer. In a completely free market,
producers often have the upper hand because they are in control of their products and
processes. This potentially lead to unethical practices (using cheap or harmful materials,
lying about benefits, etc.), which are deemed harmful for society as a whole.
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. The
practice also surfaces in hiding lower priced items from customers who have a higher
willingness to pay. This one is a little tricky, because it is socially accepted in some cases,
yet rejected in others. For example, very few people would complain that the 80 year old
man and his 2 year old great-granddaughter pay $10 less to enter the carnival. Yet, only
showing the more expensive hotels to more affluent customers caused an enormous amount
of PR backlash for travel site Orbitz.
Price skimming: Discriminating through time
Once again, another shady area. Price skimming is when the price for a product is first sold
at a very high price and then gradually lowered. The goal here is pretty obvious, producers
want to capture each step on the demand curve; consumers who are willing to pay more buy
the product first, and then a new group’ purchases are triggered with each decrease in
price. 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. Like
price discrimination, this practice isn’t illegal, but if too obvious and not tested enough, it
can trigger an unfortunate PR backlash. Apple received a lot of flack for cutting their
production cycle on the latest iPad, instantly lowering the prices of the older models.
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 situation
can take place during a shortage, such as the price of food or fresh water after a hurricane,
or when a certain product is the only one of its kind available. Pharmaceuticals and the
patents that surround them are a great example.
Producers in these instances can charge an exorbitant amount of money, but should they? I
think we’d agree that setting skyrocketing prices for food or generators following a
hurricane is wrong (and some states have laws against it), but most software costs are
relatively cheap compared to the value provided to a customer. Very different contexts, but
more generally, some consider taking advantage of consumers' needs unethical, while
others feel like it's an inevitable result of a free market and a just reward for innovation.
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