Deter Sellers From Charging Prices Higher Than The Competitive Market Price
Every person & company is a consumer. Competitive prices are good for everyone except the seller who is charging an above-market price
By David Grace (Amazon Page — David Grace Website)
This column is about preventing a society from degenerating into an elite-dominated plutocracy.
At its core, every society consists of a bunch of people living together. In every society, to a greater or lesser degree, people’s actions affect the lives of some number of the other people around them.
In A Primitive Society A Few People’s Actions Have Little Effect On Their Neighbors
In a sparsely-populated, low-tech society, there are few major economic choke points and therefore the actions of a few people generally don’t have a large impact on the lives of very many other people.
In A Complex Society A Few People’s Actions Can Have A Large Effect On Their Neighbors
In a densely-populated, high-tech society, there are many economic choke points and the actions of a few people who gain some measure of control over one of those choke points can have a huge effect on the lives of a large number of other less powerful people.
The decisions and policies of the largest corporations, Apple, Allstate, Bank Of America, Pfizer, etc. are really made by less than 100 people, probably materially made by less than 25 individual human beings.
Every Society Needs Rules Of Conduct
A successful society will provide a political and economic infrastructure that allows a large group of diverse people to live and work together efficiently while preventing a few people or the organizations they control from exercising such excessive bargaining power that they are able to charge prices for goods and services that are materially higher than the competitive-market price.
What Are Economic Choke Points?
Every society has economic choke points — bottlenecks in the production or distribution of important commodities such as energy, health care, food, housing, transportation, manufacturing, etc. The greater the control the few have over these choke points, the greater the power of those few over the lives and wealth of the many.
The more complicated the society, the more concentrated the population, the higher the level of technology, then the greater the number of choke points and the larger the bargaining power the few controlling those choke points have over the many who are consumers of the goods and services that must flow through those choke points.
The greater the imbalance in bargaining power between the powerful few and the less-powerful many, then the more the few can charge prices that are higher than a highly competitive market price and can sell products that are inferior to those that would be delivered in a highly competitive market.
Tactics The Few With Control Of A Choke Point Use To Gain More Money
The few can use the massively unequal bargaining power they hold because of their control over an economic choke point to overcharge the weaker many through a myriad of strategies:
- A group of sellers with a substantial market share implementing a follow-the-leader, cartel-like pricing strategy.
— — — The pharmaceutical market and the real estate rental market offer numerous instances of sellers/lessors raising prices in lockstep irrespective of the size of the available supply.
- Levying surprise fees and/or additional charges on top of the advertised price.
— — — Hotels that offer accommodations for a set price and then add parking fees, resort fees, and other charges to the final bill are an example.
- Employing policies of refusing to fully deliver promised products or services either at all or in a commercially reasonable manner.
— — — Insurance carriers delaying the approval and payment of claims for months or even years is an example of this form of the exploitation of the less powerful many by the more powerful few.
- Enacting post-purchase policies designed to extract additional charges at a later date.
— — — John Deere is famous for only allowing its products to be repaired at a John Deere facility at a high price so that farmers who have paid tens or hundreds of thousands of dollars for their equipment find that equipment unusable unless they pay the manufacturer substantially more money to repair and maintain it than other for-profit businesses would charge to perform the same the same work.
- Designing products to fail after a certain period of time thus requiring the owner to pay an annual fee to keep the item working.
— — — BMW recently attempted to charge their customers an annual fee to keep the heated seats in their cars working.
- Securing higher than competitive prices through control of distribution channels, raw materials, intellectual property rights, production facilities or other choke points in the manufacture and/or delivery of goods and services.
The schemes, strategies, and mechanisms that the more powerful few can use to economically exploit the less powerful many are almost infinite in their scope, but they all have one thing in common — charging the consumer a price that is higher than the highly-competitive market price for the good or service and/or delivering products and services inferior to those that would be delivered by providers in a highly competitive market.
What Is The Highly Competitive Market Price?
In a highly competitive market, the profit motive forces competing independent sellers to charge a price equal to the product’s Cost+Overhead+a Reasonable Profit (C+O+P).
What Is A “Reasonable” Profit?
In most industries a reasonable profit is considered to be between 10% and 25% of the total of cost+overhead.
For example, if the labor, materials and overhead cost of a vial of insulin was $60, then a C+O+P price would be around $72.
Why Do Sellers Need To Be Able To Make A Reasonable Profit?
If sellers don’t have a reasonable hope that they can earn a reasonable profit, then investors won’t invest, entrepreneurs won’t build, and innovators won’t improve. Profit is the carrot that motivates capitalists to invest, build, provide and improve products and services.
Prices that are too low benefit the consumers of that particular product or service but they also damage the society as a whole by reducing the investment in, the manufacture of, and the improvement and innovation of that product.
Profits that are too low drive products out of the market.
Why Prices That Are Higher Than The Competitive Price Are Detrimental
Prices that are above the competitive price benefit the producers of that particular product or service but damage the society as a whole by increasing the consumers’ costs of acquiring that product or service. That means that those consumers have less money to spend on buying other products or services that are or might be offered by other sellers.
Profits that are above the competitive price drive other products out the market by diverting the money that would otherwise be available to buy those other products into the pockets of the producers of the above-competitive-price products.
The ability to charge a price higher than 25% of Cost + Overhead price is not necessary to motivate entrepreneurs and investors to enter that industry, so there is no benefit to consumers or to the economy as a whole in allowing those producers to charge a higher than competitive market price.
In fact, because every person and every business is a consumer of something, higher than competitive prices distort the economy and hurt everyone except the particular seller that has the bargaining power to charge that higher than competitive-market price.
Allowing those with a measure of control over an economic choke point to charge a price substantially higher than the competitive-market price allows the powerful few to exploit the weaker many to the detriment of the economy as a whole and the society as a whole.
How To Deter Higher Than Competitive Prices
How do you deter sellers charging higher than competitive-market prices?
Levy an excess profits tax under which profits in excess of 25% of deductible costs are subject to a 100% tax.
If you take away the profits that result from prices that exceed the competitive-market price, sellers will have little incentive to charge a price higher than the competitive-market price.
— David Grace (Amazon Page — David Grace Website)
