When opportunity trumps ethics in essentials market

As ethicists, we argue that though the numbers game is very enticing, the happiness quotient does play an important role in long-term viability of democracy

In a typical market economy, demand and supply determine prices, with limited or no government interventions. Therefore, going by the first principles of microeconomic theory, if the demand is more than supply, prices would rise and vice versa. Sudden spikes in demand and supply shortages are especially felt during calamities such as wars or earthquakes. India, though more of a mixed economy, has had its share of woes with unprecedented price hikes due to demand and supply shocks.

FILE PHOTO: Customers buy fruits and vegetables at an open air evening market in Ahmedabad (REUTERS)

Take tomato prices in India. Some months ago, the price of tomatoes shot up to ₹200 per kg. This price hike happened due to the low production of tomatoes, which was attributed to scarce rainfall and extreme heat conditions. Shortage of rainfall reduced the crop, resulting in higher market rates.

If one examines the domino effect of this, one would not be astonished. Not so laughably, some establishments hired bouncers to guard the “priceless” tomatoes to prevent thefts. Most restaurants stopped adding tomatoes to sandwiches and green salad. Truckers charged exorbitant fees to ferry tomatoes fearing a reaction from angered consumers. Medium-income households changed their routine to eating tomato-less (albeit tasteless) lentils with rice.

This price hike of tomatoes in India due to production deficit from adverse weather conditions is what economists might call price gouging. More formally, price gouging is a practice where firms raise prices in response to supply and demand shocks that occur typically after emergencies or natural calamities. During the Covid-19 pandemic, essential medicines were black-marketed in some cases. While pharmaceutical companies handed out bonus cheques to their employees, other companies laid them off or halved their salaries in a rather tragic irony.

Ethically, should firms hike prices during calamities and emergencies? Some economists would answer winsomely — why not? For instance, Nobel laureate Milton Friedman’s famous viewpoint is “gougers deserve a medal” for clearing the market. This ethics versus opportunity is a vexed debate often resting in favour of “opportunity” as the logical corollary of a market-driven economy. Are business owners morally obligated to provide customers fair access to essential items in times of crises and a resultant desperate need or seize the opportunity to hike prices?

Regulators argue that since price gouging distorts prices, several countries have anti-price gouging laws in place as a preventative measure. The United States, in response to the widespread pandemic-driven price gouging, had enacted anti-gouging laws in 42 states effective from March 2021 with varied penalties. In India, the Essential Commodities Act, 1955 (later amended in 2020) ensures that essential commodities — for example, food items, drugs, and fuel among other things — be made available to Indian consumers at fair prices. However, in developed countries, prices of “essential items” do not skyrocket in the absence of a natural disaster or calamity. We argue that poor rainfall and extreme heat in India might be incomplete and imperfect reasoning.

The response of the government of India (GoI) to the tomato shortage was knee-jerk. It had launched a “Tomato Grand Challenge Hackathon” in Delhi to glean ideas on how to combat the price hike. The department of consumer affairs directed consumer cooperatives to source tomatoes from vegetable markets, and high-production states to redistribute to major cities. The individual quick-freezing procedure used by GoI to store vegetables such as peas comes to the rescue, but how long can we store tomatoes or potatoes to maintain adequate stock?

Onion prices had also risen to ₹85 per kg, which forced GoI to add 200,000 tonnes of buffer to its already existing stock of 500,000 tonnes to ensure that Indian consumers got a steady flow of the bulb at an affordable price. GoI has also set a minimum export price due to under-invoicing. It is predicted that they shall fall to ₹35 per kg by March 2024. Strangely, the prices of garlic have increased to a retail price of ₹400 per kg this month, forcing a reduction in chutneys and some dishes off the menu. Again, the weather conditions in Nashik and Pune, major producing areas, have been blamed. It is envisaged that the prices shall remain high for quite some time until the new crop hits the market again.

An in-depth investigation followed by long-term measures to prevent this by investing in modern farming methods may help. In the interim, farmers may be advised to overproduce and create buffer stocks during periods of stable weather conditions. The Essential Commodities Act needs to be amended to stipulate stiff penalties for individuals who hoard and then create artificial scarcity.

As India eyes becoming the third-largest economy, it stands to reason that its citizens enjoy the benefits of an abundant supply of essential items to eventually be able to afford some luxury items. Businesses and firms should be ethical in their pricing practices if they indeed want to retain existing customers, attract new ones, and build on future revenues.

The government, likewise, should be more transparent and strategic in its policies. As ethicists, we argue that though the numbers game is very enticing for any nation, the happiness quotient does play an important role in determining the long-term viability of democracy, political stability, and economic vibrancy.

Sharmistha Sikdar is an assistant professor of marketing, at Tuck School of Business, Dartmouth College and an advisory board member, Council for Fair Business Practices, and Swapnil Kothari is an international corporate lawyer and president, Council for Fair Business Practices. The views expressed are personal