Pricing a product ethically is a major decision for any business. Businesses who use ethical pricing strategies to sell their products and earn a profit are far more respected than those that hurt and defraud competitors or even consumers. To practice ethical pricing, you need to be able to spot the ethical issues that hinder fair pricing.
An ethical pricing strategy goes beyond simply following the law. Similarly, not all unethical pricing strategies are fraudulent or illegal. Ethical decisions are difficult sometimes because there isn’t a defined line for morally right and wrong decisions. As with many ethical problems in business, we need to take a step back, and view our decisions as a greater part of the business community, and set ethical standards for ourselves.
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, anti-competitive pricing arises where a group of producers collude to raise prices above the level that would apply in a freely operating market.
Another instance of unethical pricing elaborately discussed in the book is 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 defence sectors, as also in a wide-range of government procurement arrangements.
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.
Bid rigging: Favoritism
This one’s more for the proposal crows, but bid rigging involves promising a commercial contract to one group, even though you make it look like multiple parties had the opportunity to submit a bid. Not only is this a moral no no, but it’s also one of the few the government follows up on, especially within their own ranks, because of the number of bids and contracts the government deals with on a yearly bases. This practice hurts consumers considerably, because the best producer doesn’t receive the work necessarily.
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 hurricanse 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.
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 groups’ purchases are triggered with each decrease in price.
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. 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.
Interestingly enough though, even with this possibility only a handful of pricing practices are regulated by the government, mainly because you’re not really sure someone had broken a pricing law until you see results. For example, while predatory pricing, aka pricing extremely low to drive competitors out the market, is illegal, it’s difficult to prove that the price decreases had such an intention and were not simply the result of competitor-based pricing. It’s like telling a child that he can have a cookie only if he finishes his vegetables, but with no way to discern if the kid ate the peas or if they were slipped to the dog. Essentially, most laws blindly attempt to curb motivations for doing things, rather than results.