Consumer dissonance: Focus policy on market rivalry instead of pricing strategy
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In a country of highly price-conscious consumers, even a liberalized economy must endure an itch for price control that seems to surface in policy circles every few years. The latest instance is an idea reported to have popped up as part of a proposal to revise India's MRP system. Under it, as of now, consumer-facing companies must display a 'maximum retail price' on a product's pack above which it cannot legally be retailed.
In a country of highly price-conscious consumers, even a liberalized economy must endure an itch for price control that seems to surface in policy circles every few years. The latest instance is an idea reported to have popped up as part of a proposal to revise India's MRP system. Under it, as of now, consumer-facing companies must display a 'maximum retail price' on a product's pack above which it cannot legally be retailed.
While free markets of the West have no such price caps, clearly marked MRPs are useful for their information value. Marketers need to convey the top prices they want charged, while buyers need a way to check if they are being asked to overpay.
Also Read: Let retail fuel prices drop to support India's growth
To be sure, this does not always address consumer dissonance. A recent purchase that's spotted selling online (or elsewhere) at half the price, say, could make one wonder what its 'real price' is (or should be). Seen this way, the credibility of MRPs might be at stake.
Before India's GST regime was put in place, sales tax was typically imposed on MRPs, which held mark-ups in check. Now that actual sales bills are taxed, MRPs can costlessly be hiked by companies to make discounts look alluring. Does all this call for extra 'transparency' in the form of new MRP guidelines asking for cost-linked prices? Since the idea has been floated, we must grapple with it.
No matter how well intended, and even if it's aimed only at items of everyday utility, it is an idea whose time has clearly passed. It is for good reason that India's Legal Metrology Act, under which MRPs operate, doesn't empower the Centre to prescribe any pricing formula. Cost-derived MRPs would assume that cost-plus pricing is the only valid game in town.
Such an assumption would be a relic of our closed economy, an era of monopolies, weak growth and centrally set prices, with very little space left for price signals from markets to shape the allocation of resources. Prices were subject to diktats in the name of consumer protection back then, but satisfaction levels began to rise only after market forces were given a more effective role to play in driving prosperity.
Our policy pivot in favour of the free market includes the freedom of an enterprise to craft its very own pricing strategy in a well-contested field of business. Indeed, it is entirely fair for a product's price to reflect its value as perceived by its target audience of buyers, who may be pleased to pay a fortune for the fuzzy benefits of a fancied brand, for instance. This may hold even in modestly priced product categories.
The state should not intervene if both sides are satisfied and it generates value. While the Centre's cost-link idea is still in an exploratory stage, it could be costly for the economy if businesses find they cannot price their wares as they deem fit.
Also Read: Quick-commerce players should come clean on their pricing game
As a matter of principle, a free market relies on competition to regulate prices. Sure, this device could fail if the rivalry in a field is so weak that the usual risk of losing sales to rivals does not deter a firm from using extortive pricing to gouge customers. Predatory pricing to drive competitors out of business is another unfair practice that reveals a sector's failure to regulate itself. But these failures are for antitrust authorities to address.
To secure the interests of consumers, we must focus on the adequacy or lack of competitive dynamics. Several sectors with high entry barriers, for example, host duopolies today. We need a policy thrust that favours the economy—and this means robust competition, not state intervention. Topics You May Be Interested In
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