My good friend Anupam Manur of Takshashila institute has a provoking article in The Hindu.
He says we need to revisit and perhaps abolish the idea of Maximum Retail Price (MRP):
The maximum retail price (MRP) that is printed on all packaged commodities that consumers purchase was introduced in 1990 by the Ministry of Civil Supplies, Department of Legal Metrology, by making an amendment to the Standards of Weights and Measures Act (Packaged Commodities’ Rules) (1976). It was meant to prevent tax evasion and protect consumers from profiteering by retailers. Before the amendment, manufacturers could print either the maximum retail price (inclusive of all taxes) or the retail price (local taxes extra). When producers opted for the latter method, it was found that retailers often charged more than the locally applicable taxes. Thus, the amendment was made to introduce the compulsory printing of MRP on all packaged commodities.
While the intention to protect consumers in a pre-liberalised India can be lauded, continuing the system today does not make any sense. The practice of MRP in India is unique, archaic and dysfunctional. India is perhaps the only country in the world to have such a system, where it is punishable by law to charge a price higher than the printed maximum retail price. In most countries, the system of having a universally enforceable printed price is viewed as being akin to price fixing and is thus prohibited as being anti-competitive.
I didn’t know this at all. So much so for studying economics when one can’t question and know basics. And this is as basic as it can get – know your prices.
The author rightly says that MRP is abused more often than honored really. It has become a floor price and not the maximum as the abbreviation indicates.
He reviews both pros and cons of having a MRP system in today’s much more liberal economy:
The MRP, by providing a focal point for retailers, becomes a de facto uniform price and creates retail price collusion. Thus, MRP often ends up hurting the very consumers it sought to protect.
One justification that is often given in defence of MRP is that it is meant to protect consumers in remote locations who do not have the choice to go to different stores in search of the right price. While MRP aims to establish uniform prices, irrespective of whether it is in a commercial urban area or a remote village in the Western Ghats, the result is often damaging to both retailers and consumers. Retailers in remote locations and in villages often have to bear high transportation costs, which they cannot pass on to the end consumer, since they are legally not allowed to charge a price higher than the MRP. They, therefore, end up making losses. In order to avoid this, they choose not to stock many products, thereby reducing the choice available to consumers in these locations. If, however, they were allowed to determine their own price, they would factor in the transportation costs and charge a slightly higher price than what the MRP presently dictates. Eventually, seeing that there is a demand for these products and that a retailer is making super-normal profits, more shops will open up in that area. When the demand from retailers increases, wholesalers and manufacturers will create better facilities for distribution.
Another important defence for maintaining the MRP system is that it eliminates information asymmetry and provides a benchmark to illiterate consumers. However, with increasing penetration of Internet-enabled smart phones, it is not hard to imagine an app that can collate different retail prices from a particular location. In the beginning, the government can devote some of the huge resources it currently spends on enforcing MRP to develop a mechanism for dissemination of information. Gradually, given its utility, many private players will develop apps that will provide information on different retail prices.
Finally, it has to be asked whether it should be the right, or even the duty, of manufacturers to set the price at which a product will be sold to the end user. In doing so, the manufacturer gets to decide the profit margins of the retailer, which is essentially contradictory to a free market system.
Just as a consumer has the right to buy a product at a particular price, the retailer should have a right to sell his product at any price. If he charges a higher price, the customer is free to go to another store. Retail density in India is high enough for the market mechanism to function properly, as the OECD 2007 Report on India notes. Even in places that do not have high retail density, if retailers charge very high prices in the absence of an MRP, other retailers will soon enter the market and the resulting competition will eventually reduce prices.
The MRP system has existed in India without being questioned for too long now. It is time to give free markets a chance.
The article has got some seventy comments which must be a record of sorts. Clearly indicates how controversial the article’s stance is.
I mean the key aspect of the article is to think about how prices are really determined for various products (and services) and set in India. Are we allowing markets to function? Is setting MRP enabling markets to function or the entire idea is dysfunctional as suggested by the author? Does it help keep inflation lower or actually befriends the menace?
Clearly an issue which needs to be debated much more than the usual inflation targeting jazz we are obsessed with. If we do not know or care about how prices are really established, what good can we make of inflation really?