Determining Fair Pricing in Business and Economics

To determine whether a price is fair, we need to consider several factors such as market value, quality, demand, and competition. Let's explore these concepts and the nuances involved in defining fair pricing.

What is Fair Pricing?

Fair is an emotional term. It doesn’t have a fixed value. As long as the price is what a person is willing to pay, then the price is fair. The seller always wants to get more, and the buyer always wants to pay less, but if they make the exchange voluntarily, each values what they are getting more than what they are giving.

Market Price vs. Fair Price

The term “fair” has no relevance in commercial or business transactions. My idea of “fair” if I am a seller and your idea of “fair” if you are a buyer are going to be rather different. That is why for commercial transactions, we talk about a market price, not a fair price. A market price can be sort of quantitatively determined. A fair price cannot.

Economics and Fair Pricing

The books author is sort of right as far as economics is concerned because modern economics does not place value judgments on what constitutes fair pricing. Normative economics is what is done when we place moral values on economic activities, while positive economics is what is done when we simply examine economic choices and try to predict the consequences. There are no absolute values in positive economics; people take these objective predictions and determine for themselves what is fair.

The Human Instinct for Sharing

Humans lived in groups because they believed that the group can face external adversaries better than the individual can. Adversaries such as floods, famines, and wild animals necessitated sharing and caring for each other, which is essential for human survival. This instinct can be seen even in wild animals.

Thought Experiment: Fair Pricing for Medicines

Consider the example of a child requiring a medicine called Ventrolin. Would you charge your child 300 for it? At what point do you start charging 300 for a 10-unit medicine? Exploitative pricing, where prices do not reflect fair value, can occur with people outside of your immediate circle.

Ethical and Legal Perspective on Exploitation

Exploitative pricing, where prices are unfairly skewed to benefit one party at the expense of the other, is unethical. It makes us collectively vulnerable as a society. While it is legal in all free-market economies, it is not fair. To me, a simpler approach to fair pricing would be:

Production cost marketing tax profit (a portion will be determined by a factor of bank interest rate) A reasonable profit margin to cover for capital expenditure, seasonal variation, and insurance costs for calamities.

Anything more than this can be seen as greed pricing, leading to exploitative pricing—legal but not fair.

Understanding fair pricing involves a balance between market forces, ethical considerations, and the broader societal context. By examining these factors, we can strive to achieve a more fair and equitable pricing system.

Key Points

Fair pricing is subjective and varies based on individual perspectives. Market prices are more quantitatively determined and are generally a better measure of fairness. Mixing normative and positive economics can help in examining economic choices and their consequences.

In conclusion, fair pricing is a dynamic and complex concept that considers various aspects of economics, ethics, and societal needs. By continuously evaluating these factors, we can work towards a more fair and equitable pricing system.