“Maximum Retail Price”, the absurd idea that socialist India has invented

A commentator has written:

Mr. Sanjeev, On my way to office this morning, stopped in a shop to buy a pack of cigarette (MRP Rs 58) Shop keeper rounded it off to 60 and gave Rs 40 back for my Rs 100. I asked him politely “if you are running out of change, no issues I’ll take it next time”. He replied saying “Saar, it is 60 only”, it made me angry but what made me more furious is a fellow customer telling me “it’s OK saar, just Rs. 2).

I did spend another 5 min to buy from different shop but do you think that crook would change, even if 100 customers do this? Can I complain this? Individuals should change and I doubt if they can / will?

My response:

Dear Sivasundar

The idea of MRP is inconsistent with liberty. Only in socialist India does this idea prevail.

Unfortunately, I don’t agree with you about your cigarette price issue. The market should be free to sell at any price. You are free to buy from others.

Corruption is ENTIRELY different. There the price is LEGISLATED by the people, and yet there are demands made by politicians and bureaucrats. And there is A TOTAL MONOPOLY. You can’t buy from anyone else.

So let’s not mix up MRP with corruption.

The idea of MRP should go.

s

A 2007 discussion

A very similar discussion took place in November 2007 on my BFN blog. Here’s a cut and paste of that discussion:

Here’s a comment from a reader, and my response:

Reader’s comment:
“I wonder what you have to say about max retail price marked on products in india. It does help to assure me that I am not paying too much, without the need for extensive market survey. On the other hand, free market forces are not compromised as the trader is free to sell the product below the marked price in order to attract business. I am sure this labelling adds to the cost of the product, but to me, it is well worth the peace of mind it brings to me.

In the US, one finds that prices of products vary from store to store, even belonging to the same chain. Frequently prices are not marked, other than the bar code which only the computer can read. When picking up the product, I do have a choice of checking with the clerk at the counter, before buying, but it is tedious. So I end up gambling in trusting that the chain will not over charge. I would definitely prefer a legal requirement for all products to be clearly labeled indicating their price, so that i can compare with other chains BEFORE buying. I would also prefer there to be a limit on max price for every thing. In the US (as in Australia), petrol price can change a lot from one pump to another only a few kms away. One can possibly compare prices on the Internet, but this is certainly not convenient for the tourist. The pumps tend to steeply increase price if there is no other pump in the vicinity….i would prefer limitation being placed on how high he can go.”

My response:
“There is a difference between your preference and what the state should do. I want things free. Does that mean I can coerce the state to steal from someone? Key question: Has the high price cost you your health or your life? You are always free not to take petrol from a remote petrol station but to go further or if you don’t like that, to carry your own petrol in boot of the car.

The key issue is freedom cuts both ways: you are free to buy or not buy, the seller must also be free to sell or not sell. Are you aware of the costs incurred by a remote petrol station in the middle of nowhere? He is not a Bill Gates but someone doing you a great favour by setting up shop in the middle of nowhere – surviving on the custom of a few people who pass by. Without him your car would stop in the middle; nowhere to go. He provides a great service but in a manner that he can survive, keeping local competition in mind. If he was becoming a wealthy Bill Gates in a remote corner of the world, guess what, competition would flood into that part of the world, and drive prices down.

Similarly MRP – that is a nasty restriction on the market. It is a blunt instrument. It doesn’t recognise local circumstances. It increases paper work needlessly and shouldn’t be made compulsory. It treats all parts of India the same – there is a huge cost of transportation involved from factory to remote villages. It creates an under-supply in some parts of India where that price is unviable, and it also creates over-charging in places where the real price is much lower. When the retailer has MRP printed on a product, he will almost certainly charge MRP even if it costs him much less. The same thing applies in USA with the recommended retail price (RRP) – which gives an overall sense of the cost of the product. A book also has such a price printed on it. But if I am not mistaken, RRP is optional – each producer (not government) can decide if he/she wants to use that method to market products (it seem to be suitable for things which are sold in big shops), and the retailer can then set prices based on his/her real costs and the local competition. Very few people buys at RRP in USA, on the other hand most of us buy at MRP in India.

Yes, if the MRP of a product is so high that you fall below the poverty line in consequence, then in the free market model, the government will pay you to rise above the poverty line.

Simply put, let markets freely decide all prices: that is not a matter for government to intervene. If equity issues arise, they should be dealt with ONCE [Addendum: but separately!] – to ensure no one falls below the poverty line.”