Pricing Ethics in Market Place

The following gives the list of unethical practises. All these practises are explained
individually .

% Bid rigging
% Dumping (pricing policy)
% Predatory pricing
% Price discrimination
% Price fixing
% Price skimming
Price war

In economics, "dumping" can refer to any kind of predatory pricing. However, the
word is now generally used only in the context of international trade law, where
dumping is defined as the act of a manufacturer in one country exporting a product to
another country at a price which is either below the price it charges in its home market
or is below its costs of production. The term has a negative connotation, but advocates
of free markets see "dumping" as beneficial for consumers and believe that
protectionism to prevent it would have net negative consequences. Advocates for
workers and laborers however, believe that safeguarding businesses against predatory
practices, such as dumping, help alleviate some of the harsher consequences of free
trade between economies at different stages of development.

A standard technical definition of dumping is the act of charging a lower price for a
good in a foreign market than one charges for the same good in a domestic market.
This is often referred to as selling at less than "fair value". Under the World Trade
Organization (WTO) Agreement, dumping is condemned (but is not prohibited) if it
causes or threatens to cause material injury to a domestic industry in the importing
country.
Legal issues

If a company exports a product at a price lower than the price it normally charges on
its own home market, it is said to be "dumping" the product. Opinions differ as to
whether or not this is unfair competition, but many governments take action against
dumping in order to defend their domestic industries. The WTO agreement does not
pass judgment. Its focus is on how governments can or cannot react to dumping—it
disciplines anti-dumping actions, and it is often called the "Anti-Dumping
Agreement". (This focuses only on the reaction to dumping contrasts with the
approach of the Subsidies & Countervailing Measures Agreement.)

The legal definitions are more precise, but broadly speaking the WTO agreement
allows governments to act against dumping where there is genuine ("material") injury
to the competing domestic industry. In order to do that the government has to be able
to show that dumping is taking place, calculate the extent of dumping (how much
lower the export price is compared to the exporter’s home market price), and show
that the dumping is causing injury or threatening to do so.

Definitions and extent

While permitted by the WTO, General Agreement on Tariffs and Trade (GATT)
(Article VI) allows countries the option of taking action against dumping. The Anti-
Dumping Agreement clarifies and expands Article VI, and the two operate together.
They allow countries to act in a way that would normally break the GATT principles
of binding a tariff and not discriminating between trading partners—typically anti-
dumping action means charging extra import duty on the particular product from the
particular exporting country in order to bring its price closer to the “normal value” or
to remove the injury to domestic industry in the importing country.

There are many different ways of calculating whether a particular product is being
dumped heavily or only lightly. The agreement narrows down the range of possible
options. It provides three methods to calculate a product’s “normal value”. The main
one is based on the price in the exporter’s domestic market. When this cannot be used,
two alternatives are available—the price charged by the exporter in another country,
or a calculation based on the combination of the exporter’s production costs, other
expenses and normal profit margins. And the agreement also specifies how a fair
comparison can be made between the export price and what would be a normal price.

Calculating the extent of dumping on a product is not enough. Anti-dumping

measures can only be applied if the dumping is hurting the industry in the importing
country. Therefore, a detailed investigation has to be conducted according to specified
rules first. The investigation must evaluate all relevant economic factors that have a
bearing on the state of the industry in question. If the investigation shows dumping is
taking place and domestic industry is being hurt, the exporting company can
undertake to raise its price to an agreed level in order to avoid anti-dumping import
duty.

Procedures in investigation and litigation

Detailed procedures are set out on how anti-dumping cases are to be initiated, how the
investigations are to be conducted, and the conditions for ensuring that all interested
parties are given an opportunity to present evidence. Anti-dumping measures must
expire five years after the date of imposition, unless a review shows that ending the
measure would lead to injury.

Anti-dumping investigations are to end immediately in cases where the authorities

determine that the margin of dumping is, de minimis, or insignificantly small (defined
as less than 2% of the export price of the product). Other conditions are also set. For
example, the investigations also have to end if the volume of dumped imports is
negligible (i.e., if the volume from one country is less than 3% of total imports of that
product—although investigations can proceed if several countries, each supplying less
than 3% of the imports, together account for 7% or more of total imports). The
agreement says member countries must inform the Committee on Anti-Dumping
Practices about all preliminary and final anti-dumping actions, promptly and in detail.
They must also report on all investigations twice a year. When differences arise,
members are encouraged to consult each other. They can also use the WTO’s dispute
settlement procedure.
Actions in the European Union
European Union anti-dumping is under the purview of the European Council. It is
governed by European Council regulation 384/96. However, implementation of anti-
dumping actions (trade defence actions) is taken after voting by various committees
with member state representation.

The bureaucratic entity responsible for advising member states on anti-dumping

actions is the Directorate General Trade (DG Trade), based in Brussels. Community
industry can apply to have an anti-dumping investigation begin. DG Trade first
investigates the standing of the complainants. If they are found to represent at least
25% of community industry, the investigation will probably begin. The process is
guided by quite specific guidance in the regulations. The DG Trade will make a
recommendation to a committee known as the Anti-Dumping Advisory Committee,
on which each member state has one vote. Member states abstaining will be treated as
if they voted in favour of industrial protection, a voting system which has come under
considerable criticism.

As is implied by the criterion for beginning an investigation, EU anti-dumping actions

are primarily considered part of a "trade defence" portfolio. Consumer interests and
non-industry related interests ("community interests") are not emphasized during an
investigation. An investigation typically looks for damage caused by dumping to
community producers, and the level of tariff set is based on the damage done to
community producers by dumping.

If consensus is not found, the decision goes to the European Council.

If imposed, duties last for five years theoretically. In practice they last at least a year
longer, because expiry reviews are usually initiated at the end of the five years, and
during the review process the status-quo is maintained.
 Predatory Pricing

In business and economics, 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. If competitors or potential competitors
cannot sustain equal or lower prices without losing money, they go out of business or
choose not to enter the business. The predatory merchant then has fewer competitors
or is even a de facto monopoly, and hypothetically could then raise prices above what
the market would otherwise bear.

Critics of the concept argue that it is a conspiracy theory, that there are "virtually no...
economists" who believe the theory behind the concept (although a few believe it is
theoretically possible based on models, there are virtually none who believe it is an
empirical phenomenon), and that there are no known examples of a company raising
prices after vanquishing all possible competition.

In many countries predatory pricing is considered anti-competitive and is illegal under

antitrust laws. It is usually difficult to prove that prices dropped because of deliberate
predatory pricing rather than legitimate price competition. In any case, competitors
may be driven out of the market before the case is ever heard.
Price Discrimination

Price discrimination or price differentiation exists when sales of identical goods or

services are transacted at different prices from the same provider. In a theoretical
market with perfect information, perfect substitutes, and no transaction costs or
prohibition on secondary exchange (or re-selling) to prevent arbitrage, price
discrimination can only be a feature of monopolistic and oligopolistic markets, where
market power can be exercised. Otherwise, the moment the seller tries to sell the same
good at different prices, the buyer at the lower price can arbitrage by selling to the
consumer buying at the higher price but with a tiny discount. However, product
heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing
unsustainable in the long run) can allow for some degree of differential pricing to
different consumers, even in fully competitive retail or industrial markets. Price
discrimination also occurs when the same price is charged to customers which have
different supply costs.

The effects of price discrimination on social efficiency are unclear; typically such
behavior leads to lower prices for some consumers and higher prices for others.
Output can be expanded when price discrimination is very efficient, but output can
also decline when discrimination is more effective at extracting surplus from high-
valued users than expanding sales to low valued users. Even if output remains
constant, price discrimination can reduce efficiency by misallocating output among
consumers.

Price discrimination requires market segmentation and some means to discourage

discount customers from becoming resellers and, by extension, competitors. This
usually entails using one or more means of preventing any resale, keeping the
different price groups separate, making price comparisons difficult, or restricting
pricing information. The boundary set up by the marketer to keep segments separate
are referred to as a rate fence. Price discrimination is thus very common in services,
where resale is not possible; an example is student discounts at museums. Price
discrimination in intellectual property is also enforced by law and by technology. In
the market for DVDs, DVD players are designed - by law - with chips to prevent use
of an inexpensive copy of the DVD (for example legally purchased in India) from
being used in a higher price market (like the US). The Digital Millennium Copyright
Act has provisions to outlaw circumventing of such devices to protect the enhanced
monopoly profits that copyright holders can obtain from price discrimination against
higher price market segments.

Price discrimination can also be seen where the requirement that goods be identical is
relaxed. For example, so-called "premium products" (including relatively simple
products, such as cappuccino compared to regular coffee) have a price differential that
is not explained by the cost of production. Some economists have argued that this is a
form of price discrimination exercised by providing a means for consumers to reveal
their willingness to pay.
 Price Fixing

Price fixing is an agreement between participants on the same side in a market to buy
or sell a product, service, or commodity only at a fixed price, or maintain the market
conditions such that the price is maintained at a given level by controlling supply and
demand. The group of market makers involved in price fixing is sometimes referred to
as a cartel.

The intent of price fixing may be to push the price of a product as high as possible,
leading to profits for all sellers, but it may also have the goal to fix, peg, discount, or
stabilize prices. The defining characteristic of price fixing is any agreement regarding
price, whether expressed or implied.

Price fixing requires a conspiracy between sellers or buyers; the purpose is to

coordinate pricing for mutual benefit of the traders. Sellers might agree to sell at a
common target price; set a common minimum price; buy the product from a supplier
at a specified maximum price; adhere to a price book or list price; engage in
cooperative price advertising; standardize financial credit terms offered to purchasers;
use uniform trade-in allowances; limit discounts; discontinue a free service or fix the
price of one component of an overall service; adhere uniformly to previously-
announced prices and terms of sale; establish uniform costs and markups; impose
mandatory surcharges; purposefully reduce output or sales in order to charge higher
prices; or purposefully share or pool markets, territories, or customers.

Price fixing is permitted in some markets but not others; where allowed it is often
known as resale price maintenance or retail price maintenance.

In neo-classical economics, price fixing is inefficient. The anti-competitive agreement

by producers to fix prices above the market price transfers some of the consumer
surplus to those producers and also results in a deadweight loss.
 Price War

Price war is a term used in economic sector to indicate a state of intense competitive
rivalry accompanied by a multi-lateral series of price reduction. One competitor will
lower its price, then others will lower their prices to match. If one of them reduces
their price again, a new round of reductions starts. In the short term, price wars are
good for consumers, who can take advantage of lower prices. Often they are not good
for the companies involved. The lower prices reduce profit margins and can threaten
their survival.

In the medium to long term, they can be good for the dominant firms in the industry.
Typically, the smaller, more marginal, firms cannot compete and must close. The
remaining firms absorb the market share of those that have closed. The real losers
then, are the marginal firms and their investors. In the long term, the consumer may
lose too. With fewer firms in the industry, prices tend to increase, sometimes higher
than before the price war started.

Causes :

The main reasons that price wars occur are:

% Product differentiation: Some products are, or at least are seen as, commodities.
Because there is little to choose between brands, price is the main competing
factor.
% Penetration pricing: If a merchant is trying to enter an established market, it may
offer lower prices than existing brands.
% Oligopoly: If the industry structure is oligopolistic (that is, has few competitors),
the players will closely monitor each others' prices and be prepared to respond
to any price cuts.
% Process optimization: merchants may incline to lower prices rather than shut down
or reduce output if they wish to maintain the economy of scale. Similarly, new
processes may make it cheaper to make the same product.
% Bankruptcy: Companies near bankruptcy may be forced to reduce their prices to
increase sales volume and thereby provide enough liquidity to survive.
% Predatory pricing: A merchant with a healthy bank balance may deliberate price
new or existing products in an attempt to topple existing merchants in th