CMA.Devarajan Swaminathan (ACMA) (1067 Points)
06 October 2011Are markets really free and fair?
If sellers do not disclose the ingredients used on the manufacture of a product and its cost, then how do market determine the price? If markets really determine price, then how come carterls are so rampant?
What I would like to know is that will demand for a product at a particular price point be influenced, if the cost point of the product and its input ingredients are also known to the customer.
Your thoughts.
CA Goutam Sharma
(Chartered Accountant in Practice)
(468 Points)
Replied 08 October 2011
Mr Devarajan,
You have asked a billion dollars question. we often come up with statements that markets are free, Market determine the price. etc.
Market determines the price but not the cost.
Sale price of a commodity is price for seller but cost for purchaser.
Purchaser do not seek for information about the cost of the sellers. Example, cost of Salt is negligible but we as a consumer not interested in the cost of Salt. Here comes the role of market, It is no one but the market who has determined the price of salt at a level at which Buyers & Sellers both agreed irrespective of the cost.
Inspite of such technical statements, I would also like to clarify that Market has also become a relative term . Where I have no control over the Prices of cars, the large players do have. They influence the market by hook or by crook to a certain extent subject to elasticity
No, price of product is not paid by a purchaser by seeing the cost of any commodity, It is paid on the the consideration of Utility a purchaser withdraw from it.
Example, You can have a lots of drinking water free of cos in India, but It may cost you a million for aglass in the mid of desert.
CMA.Devarajan Swaminathan
(ACMA)
(1067 Points)
Replied 13 October 2011
Nice One Goutam. Thanks.
Lets stretch this a little.
Its not about curtailing the price of the product, nor its value, nor what the seller wants to sell it for. Its the sellers product, he can sell it for whatever price he wants to. For example, a person found a free pot of gold. Although it is free of cost for him, he will sell it only at the prevailing (so called market) price. But lets look at it from a buyers perspective, if he knows that the gold was a found gold, that it is free of cost, would he still buy it at the prevailing market price , would it influence his decision to buy it, would he negotiate better with the information on hand, would the quality of "found" gold play on his mind.
Without "information", the buyer is a sitting duck to what the sellers determine is the market price, that is why cartels thrive.
Just as a seller can sell only if there is a buyer, vice versa also holds true. But the catch is there are many diverse buyers against few sellers. Further sellers have unions in the form of industry associations where they protect their interest.
But where is the buyer's interest protected prior to sale in terms of availability of information about the product and at what costs. The buyer does not considerit necessary because he has never been given that information. But if he was provided with the information, he will try give it enough weightage. Just as a print of MRP is to control on the price and a customer questions products that are sold way above the MRP on Airport retail outlets, customers will start questioning if there is an unreasonable price for a product that does not justify the cost. If the customer still feels that his perceived value of the product is greater than the price that he is willing to pay for the product that costs "x" amount, he is still taking an informed decision.
CA Goutam Sharma
(Chartered Accountant in Practice)
(468 Points)
Replied 14 October 2011
Its nice to see you after a pause.
Sir, I was waiting for your thoughts,as not much of the members shown interest in this very interesting & practical issue.
I think , The power of negotiation exists in some situations. For Instance, While purchasing Gold from a thief, Then certainly I will be in position to control the price at that point of time,but if the same theft Gold is sold by a goldsmith, then I will have no control over the price irrespective of the fact that whether the smith purchased it from a thief or not. What I wants to say is, that No one will disclose the cost of any article untill there is any statutory liability to disclose that, and I further do not belive that the disclosed cost will be the actual one.
If I have received a gold ring from my cousin as gift and I move to sell it to a goldsmith, will I disclose that the ring was a gifted one? Certainly not
Suppose, I disclosed the fact, even then, the seller will not be in a position to influence the price. If he tries to influence the price, I will move to some other Smith. This movement from one smith to another is possible only because of free market.
What is the cost of coal, petroleum?
There cost is just the cost of exploring them, wcich include some variable cost, some fixed cost & some semi variable cost. These cost move on specific trend.
However , the crude prices have shown no trend. That is because of a market ,controlled by Giant Players.
I am an auditor of a company and I know the cost of their goods , which is considerably low from their selling price,but I could not exercis any controll over the price of that commodity as an individual, because their price is accepted by the market at a large.
Every seller is also a purchaser.
I sell my time as an assistant, which apparently have no cost,but still I am Paid.
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