Case studies of unethical Issues in Pricing
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Published: Mon, 5 Dec 2016
Price fixing – An agreement between business competitors to sell the same product or service at the same price.
Price skimming – A pricing strategy, in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.
Price discrimination – exists when sales of identical goods or services are transacted at different prices from the same provider.
Bid rigging – an agreement between two or more competitors. It is a form of collusion, which is illegal in most countries. It is a form of price fixing and market allocation, and it involves an agreement in which one party of a group of bidders will be designated to win the bid. It is often practiced where contracts are determined by a call for bids, for example in the case of government construction contracts.
Price war – is a term used in business to indicate a state of intense competitive rivalry accompanied by a multi-lateral series of price reductions. One competitor will lower its price, and then others will lower their prices to match. If one of the reactors reduces their price below the original price cut, then a new round of reductions is initiated. In the short-term, price wars are good for consumers who are able to take advantage of lower prices. Typically they are not good for the companies involved. The lower prices reduce profit margins and can threaten survival. etc.
Dumping – Dumping refers to selling goods in the foreign market at prices which are lower than prices charged in the international market or less than the cost price of the product. This is basically done to destroy the domestic market of the importing country and gain a monopoly like position in that market. Most of the countries have anti-dumping arrangements in place. It can also be referred as a form of protectionism.
Fuel Pricing In India
Background of the Case:
India is not only one of the fastest growing economies in the world but also is home to one-fifth of world’s population. At this rate of growth, the demand for the petroleum products is on an expected rise in the country. Considering this socio-economic ramifications, the government has been substantially involved in the pricing and supply of these petroleum products.
The involvement of the government is not ambiguous as the demand of the petroleum products has been increasing at 15% per annum. Also, the availability of these products at home ground is highly inaccessible, the country has to depend a lot on the imports of these products. The current import prices for India is 5.27$ per gallon as opposed to 3.27$ for USA. Further, Due to the rapid development of the economy diesel and petrol was required heavily for the carrying goods within the country. And Also due to the rapid development of the automobile sector, the demand for the petroleum products increased. Around 250 million of the country lives below the poverty line and a majority of the population have been classified as the Middle Class. It becomes the government’s responsibility to provide this section of the country with cooking fuel in subsidized prices as it cannot be afforded by them. Thus, any steep increase in the prices of these products adversely affects the Indian economy.
Course of Action:
After Independence, The cost realization of the companies was linked to ‘import parity’ type of pricing, known as Value Stock Pricing (VSA). It was a cost plus formula of the import price which included elements like shipping charges up to the Indian ports, insurance, transit losses, import duties and other levies and charges. It was followed by Administered Price Mechanism (APM) which involved artificial price fixing by the government from time to time and hike or reduction in the prices which became a political decision, rather than being a rational economic decision. The decision to dismantle the APM was taken to shift from artificial pricing of petroleum products towards pricing situation driven by demand and supply market forces. The government bought into force a new pricing mechanism with effect from 1st April 2002. The new mechanism was designed to isolate the prices of petroleum products in the country from volatile international crude oil prices. At the same time it was to ensure that the prices of certain products like kerosene and LPG remained subsidized as per the government policy.
The weakness of this new system came into the forefront with a spurt in the crude oil prices. On 5 July 2010, Protests were held against a hike in fuel prices shut down of markets, schools, airports and businesses across India and thousands of people were arrested as violence flared in some cities.
Due to the unsteady pricing mechanism in the country, Finance Minister Pranab Mukherjee while presenting Budget 2009-10 on July 6, 2009 established a committee to advice on a viable and sustainable system of pricing petroleum products. Dr. Parikh was appointed the chairman of this panel in August 2009.
Key Recommendations from the Parikh Committee:
Domestic petroleum product prices have to reflect that of international prices. The government should allow pass-through of international oil prices to domestic users. This will enable the public sector OMCs and upstream oil companies to remain financially stable and solvent.
There is no justification for continuance of subsidy for diesel and petrol and as such their prices should be raised by Rs 2.33 per lts and Rs 4.72 per lts respectively.
An additional excise duty of Rs 80,000 per vehicle should be levied on diesel car owners.
Smartcards should be used to provide subsidy to the target/needy group on kerosene and 14.2 LPG cylinders. Subsidy on LPG cylinders should be discontinued immediately except for the below the poverty line households.
The price of kerosene should be increased by Rs 6 per litre and that of LPG by Rs 100 per cylinder. The kerosene price increase should be in line with the nominal growth in agricultural GDP. LPG price should be increased in line with per capita income.
The government’s policy of incurring a cost of Rs 1.42 lakh crore towards compensating the OMCs for the under recoveries is a complete failure. The compensation burden has reached a level of 25 per cent of total revenue receipts in 2008-09, which is totally unviable and perilous to the long-term health of the economy.
The committee suggested that LPG and kerosene prices could be raised every year in step with the growth in per capital agricultural GDP at nominal rates and per capita income respectively. Freeing petrol and diesel prices would not only promote competition but also lead to more equitable sharing of inflation burden, affecting mostly people who can pay.
IPL BID RIGGING
Sweat equity is a term that refers to a party’s contribution to a project in the form of effort — as opposed to financial equity, which is a contribution in the form of capital.
In a partnership, some partners may contribute to the firm only capital and others only sweat equity. Similarly, in a startup company formed as a corporation, employees may receive stock or stock options, becoming thus part-owners of the firm, in return for accepting salaries that are below their respective market values (this includes zero wages).
Bid rigging is a form of fraud in which a commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid. This form of collusion is illegal in most countries. It is a form of price fixing and market allocation, often practiced where contracts are determined by a call for bids.
IPL planned to increase the franchise teams from 8 to 10 for IPL 4, 2011. The runaway success story of IPL had made Indian Cricket Story an incredible one. IPL has unveiled a new business segment in the Indian soil. IPL first season started with 8 franchise teams and the base price was at USD 50 million each.
Two new Indian Premier League franchisees were unveiled on March 8 for bidding.
Ahmedabad, Nagpur, Kanpur, Dharamshala, Indore, Cuttack, Gwalior and Visakhapatnam are the current cities with stadiums that could have bids for. IPL committee expected around 25 bids for these 2 new teams. Some of the companies, PE funds, media persons who had expressed their interest in the new teams were
1. Videocon Industries 2. Sahara Group 3. ICICI Ventures
4. Marylebone Cricket Club 5. Salman Khan 6. Amitabh Bachan
7. Ajay Devgan 8. Adani Group 9. Muthoot Group
9. Hero Honda 10. Sharad Pawar 11. Rendezvous Sports World
But, IPL aimed high with its 2 new teams and has proposed strict bid rules. Each new IPL team is base priced at USD 225 million (~ Rs. 1040 crores ). Bidder networth should be over $1 Billion (~ Rs. 4500 crores). Also, interested parties should submit a bank guarantee of Rs. 460 crores to participate in the bidding process. These rules made many of the above interested parties to back out and it is heard that only four bidders are in the race now for the 2 new teams are starred in the above list.
1. Sahara Group
2. Adani Group
3. Videocon Group (VC Digitial)
4. Rendezvous Sports World.
The entire case started soon after Rendezvous Sports World (RSW) won the Kochi IPL team 10 year rights for $333.33 Million, Lalit Modi, Commissioner of IPL expressed his doubt on share holding pattern of the Kochi IPL Team Owners – RSW which he made public in his tweet. One of the owners, Sunanda Pushkar was offered 70 crore worth of sweat equity. This was not in accordance with the provisions of the Companies Act under which provisions related to issue of sweat equity shares are mentioned.
Rendezvous Sports World Private Limited is a private limited company and it had granted 70 crore worth equity to Sunanda pushkar claiming that she has a professional expertise, expertise in event management and brand management. This limited company has brought other investors together to form a consortium for bidding for IPL Kochi Franchise. It has been brought to limelight by the media that Rendezvous Sports has violated all the provision of the Companies Act, 1956 in granting sweat equity to Sunanda Pushkar. This made her to surrender her share.
However the prime motive was not to point out the irregularities in the share holding pattern of Rendezvous Sports World Private Limited but it was targeted at Mr. Shahshi Tharoor who had earlier alleged Mr. Lalit Modi of delaying the process of accepting the bid on behalf of Rendezvous Sports World Private Limited.
By pointing out this irregularities Mr Lalit Modi wanted to point out the role of Mr Shahshi Tharoor who allegedly had an affair with Sunanda pushkar in pushing the interests of Rendezvous Sports World Private Limited in which he himself had indirect holdings.
This led to Mr. Shahshi Tharoor resigning from the cabinet with the issue of sweat equity out in public another issue was in the making and that was relating to BID RIGGING.
IPL Kochi owners brought to the notice of BCCI that the officials of IPL had asked them to keep their bid below $300 mn while they had asked Videocon and Adani Group to bid above $310 mn as Lalit Modi wanted to have a franchisee in Ahmedabad and not in Kochi not only this Lalit Modi had also offered the owners Of IPL Kochi an extra $50mn to surrender the ownership.
With this case of bid rigging out against Lalit Modi his transactions in the bidding process of the innaugral IPL were also exposed which were followed by IT raids and BCCI enquiries into teams like Rajasthan Royals and Punjab Kings XI.
The timeline for the entire case is as shown below
13 Apr: Junior foreign minister Shashi Tharoor accuses Lalit Modi of trying to block the winning bid for new franchise Kochi
19 Apr: Mr Tharoor quits over role in Kochi bid after it is revealed a woman friend allegedly received a free stake (Sweat equity case)
19 Apr: India orders an investigation into IPL financing amid allegations of corruption
21 Apr: Tax officials widen their investigation, raiding at least four IPL teams hours before the first semi-final.
23 Apr: Investigators question Mr Modi for hours over corruption allegations(After the issue of Bid rigging came to light)
25 Apr: Cricket board suspends Mr Modi, shortly after IPL final
26 Apr: Interim IPL head appointed. Corruption accusations against Mr Modi outlined
This is a classic example of complications in restrictive trade practices issues and corporate dispute. Bone of contention chiefly revolves around the issues of bid rigging on one side and issue of sweat equity shares flouting the provisions of Companies Act and Sweat Equity Rules, on the other side. Closer scrutiny by Central Government and Competition Commission are essential so as to bring the complicated issues at rest. Many questions related to the matter are till now unanswerable. Few among those are the validity of confidential clause as claimed by BCCI, legal status of IPL and its constitution, authority of BCCI etc. Issues of corporte governance have again once again come to the fore.
HOARDING & MANIPULATION TO PUSH UP SUGAR PRICES DURING JANUARY 2010
During January 2010, the retail prices of Sugar reached Rs. 50 per kg. & was expected to rise further because of Holi where the demands of sweet would increase thereby increasing the demand of sugar. So the sugar price was expected to reach Rs.60 just before the festival of Holi.
This price hike was a result of HOARDING of sugar by the various wholesalers & retailers. Some other factors contributing to this price hike was bulk purchase by industry & MANIPULATION of market sentiments by the private mills.
The common man was highly suffering due to this price rise & government did not have any answers to this. People feared that this would adversely affect their holi & their moods were sour. Also the MARRIAGE SEASON was approaching & people feared that if once the price went up it would continue to be up irrespective of the fact that the demand would increase or the supply would increase. An indirect effect of this price hike in sugar was that even the prices of tea & coffee were hiked & this greatly affected the mass of people.
This price hike in sugar was mainly observed in Lucknow & adjoining cities mainly in the state of Uttar Pradesh. The U.P. government held a meeting to discuss the alarming sugar price situation & review the implementation of the ESSENTIAL COMMODITIES ACT (ECA) & THE PREVENTION OF BLACK-MARKETING AND MAINTENANCE OF SUPPLIES OF ESSENTIAL COMMODITIES ACT.
THE ESSENTIAL COMMODITIES ACT (ECA), 1955:-
The Essential Commodities Act, 1955 was enacted to ensure the easy availability of essential commodities to consumers and to protect them from exploitation by unscrupulous traders. The Act provides for the regulation and control of production, distribution and pricing of commodities which are declared as essential for maintaining or increasing supplies or for securing their equitable distribution and availability at fair prices. Exercising powers under the Act, various Ministries/Departments of the Central Government and under the delegated powers, the State Governments/UT Administrations have issued orders for regulating production, distribution, pricing and other aspects of trading in respect of the commodities declared as essential. The enforcement/ implementation of the provisions of the Essential Commodities Act, 1955 lies with the State Governments and UT Administrations.
There are seven broad categories of essential commodities covered by the Act. These are (1) Drugs; (2) Fertilizer, inorganic, organic or mixed; (3) Foodstuffs, including milk, vegetables, sugar, edible oilseeds and oils; (4) Hank yarn made wholly from cotton; (5) Petroleum and petroleum products; (6) Raw jute and jute textile; (7) (i) seeds of food-crops and seeds of fruits and vegetables; (ii) seeds of cattle fodder; and (iii) jute seeds.
THE PREVENTION OF BLACK-MARKETING AND MAINTENANCE OF SUPPLIES OF ESSENTIAL COMMODITIES ACT:-
The Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities Act, 1980 is being implemented by the State Governments/UT Administrations for the prevention of unethical trade practices like hoarding and black-marketing. The Act empowers the Central and State Governments to detain persons whose activities are found to be prejudicial to the maintenance of supplies of commodities essential to the community. Detentions are made by the States/UTs in selective cases to prevent hoarding and black-marketing of the essential commodities. The price situation was further reviewed by the Government and decided with the approval of the Cabinet to further impose similar restrictions by keeping in abeyance for a period of one year with respect to sugar so as to tackle the rising trend of prices as well as to ensure availability of these commodities to the common people.
Dumping of Sport Shoes in India by China
Dumping in international trade and law is the practice by which the exporters of one country sell their products in another country, at a price which is lower than the price of that good charged in the exporter’s country, or lower than its costs of production. According to the WTO agreement, anti-dumping action is allowed to be taken by countries, only if there is material damage suffered by the competing domestic industry. Hence, to take anti-dumping action, the government has to show that dumping is taking place, followed by the extent to which it is taking place, and lastly prove that it has caused damage to the domestic industry. Hence, to take anti-dumping measures, the government needs to prove that there is damage done to the domestic industry.
In India, the ministry of commerce and industry looks into matters related to dumping. During 1999-2000, the ministry received information from reliable sources regarding dumping of sports shoes in India and exported from China. The designated authority then issued notices to the exporters from China and sent a copy of the notices to the importers of shoes in India, and advised them to submit their views. The authority also sent a questionnaire to exporters from China, to find out relevant information. They included Beijing Daihua Group, Shanghai Huoju Shoe Industrial Co. Ltd. and many 8 others. A questionnaire was also sent to importers namely Reebok India Company, Bata India Ltd. and Adidas India Pvt. Ltd., for necessary information
Information regarding injury parameters and cost of production was sought from the domestic industry, which was also furnished by the following domestic producers: Relaxo Footwear Ltd., API Associates Ltd., Nikhil Footwear Ltd., and Lakhani India Ltd.
The domestic industry reported that there was no decline in demand of sport shoes but they faced material injury (decline in their business) on the following account:-
The market share of the domestic industry has declined from 74.09% in 1999-2000 to 57.81% in the POI.
The imports from China have increased from 4.68 lakh pairs in 1999-2000 to 5.7 lakh pairs in POI (annualized). Further the imports have also been routed through Hong Kong, Singapore as per the available evidence and thus imports from China are in much higher quantity.
The production of the domestic industry has declined by 11.24% in POI as compared to 98-99.
The capacity utilization percentage has declined from 62.97% in 98-99 to 60% in 99-2000 and further to 53.26% in POI.
Investigation was carried out for the period starting from 1.4.2000 to 30.9.2000 i.e. the period of investigation (POI). The investigators confirmed the findings that the domestic industry had reported and decided to take appropriate action.
The exporters did not respond to any of the notices sent to them, which included questionnaires to find out relevant information regarding the prices of shoes in the Chinese market. However, information regarding domestic selling prices and prices charged in third countries was made available by reliable sources. These were the best sources of information available and hence, were used to find out the level of dumping.
The authority considered imposing an amount of duty equal to the level of dumping to remove the unfair advantage to the Chinese exporters while keeping the level of competition in the domestic market the same. Hence, they imposed the anti-dumping duty such that, the minimum price charged for unbranded and low end branded shoes will be 6.277$ per pair, and that for the branded category which includes Nike, Reebok and Adidas will be 18.44$ per pair. Thus, the anti-dumping duty will be the difference between the import price and the minimum selling price as given above.
Thus, the unfair edge gained by the Chinese exporters was eliminated, and the competitiveness of the markets was also sustained. There was no restriction on imports of shoes from China, which did not affect the availability of goods for the consumers.
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