Archive for the ‘pricing’ Category
Financial Speculation & Ethics
Filed under: complexity, CSR, definitions, economics, finance, investing, pricing, profits, regulations |
Leave a comment Friday I gave a talk as part of a terrific workshop on the ethics and law of financial speculation, held at the University of Montreal. (The event was co-sponsored by U of M’s Centre for Business Law and the Centre for Research in Ethics.)
As I mentioned in a posting last week, financial speculation is the subject of some controversy. Indeed, there has been plenty of discussion of regulating various forms of speculation, though whether that is possible and how best to do so is also subject to controversy.
Very roughly, “speculation” can be thought of as involving any of a range of forms of relatively high-risk investment. In a way, it is the exact opposite of a slow, safe investment such as buying government savings bonds. But it’s also different from pure gambling: in most forms of gambling, you have no reasonable expectation of making money. You might well win big, and it’s nice if you do, but really all you can expect is to have fun playing the game. Speculation on the other hand involves taking what are hopefully well-informed risks, in the hopes of exceptional returns.
Here are 3 stereotypical examples of speculation:
- Imagine that a wheat farmer is considering whether to plant wheat an additional, previously-unplanted, field. Imagine that the farmer’s total cost for doing so would be $5/bushel of wheat. If the current price of wheat is hovering right around the $5 mark, that turns planting into a risky proposition. The risk of a loss might make planting just too unattractive. Now imagine a speculator comes along and is willing to take that risk, so she offers the farmer $5.25/bushel for the wheat that has not even been planted yet. With the promise of a modest-but-guaranteed profit in hand, the farmer plants the crop. If, at harvest time, the price of wheat has gone up to $6/bushel, the speculator stands to make a tidy profit. If the price has gone down to $4/bushel, the speculator suffers a loss — but she’s in the business of speculating precisely because she has the resources to absorb such losses, and will just hope that her next investment pays off better.
- Imagine someone whose job is to invest in futures contracts on commodities such as oil or gold. A futures contract is basically a commitment to buy a specified quantity of something, at a specified price, at some date in the future. The example above involved a kind of futures contract, except in that example the investor actually did intend to buy and take possession of the farmer’s wheat once harvested. But in the vast majority of futures trading, nothing but paper ever changes hands. If a trader finds that other traders have been paying above-market prices for oil futures, she might decide that it’s worth buying some herself, in the hope that the price of oil will continue to go up because of this demand. Other traders are likely to notice, and imitate, her behaviour, with a net effect of pushing oil prices up. None of this needs to reflect any underlying change in consumer demand for oil, or any change in oil’s supply. It can all happen as the result of a combination of hunches about the future of oil and a dose of herd behaviour.
- Imagine I have a dim view of the future prospects of a company, say BP, so I decide to “short” (sell short) shares in BP. What I do is I borrow some shares in BP, say an amount that would be worth $1,000 at today’s prices. I then sell those borrowed shares. If all goes as I expect it will, the price of BP shares may drop — let’s imagine it drops 25%. I can then buy enough shares in BP, at the reduced price ($750 total), to “return” the shares to the person I originally borrowed them from. And I get to pocket the $250 difference (minus any expenses). Basically, this form of speculation — short selling — is unlike standard investments in that it involves betting that a company’s shares will go down, rather than up, in value.
There is disagreement among experts regarding just what the net effect of speculation (or indeed of particular kinds of speculation) is likely to be. Some think that speculation, as a kind of artificial demand, has the tendency to increase prices and perhaps even to result in “bubbles” that eventually burst, with tragic results. But the evidence is unclear. In particular cases, it can be very difficult to tell whether a) speculation caused the inflationary bubble, or whether b) some underlying inflationary trend spurred speculation, or whether c) it was a bit of both. And even if it’s clear that some forms of speculation sometimes have such effects, it’s not clear a) that speculation has negative effects often enough to warrant intrusive regulations, or b) that regulators will be able to single out and regulate the most worrisome forms of speculation without stomping out the useful forms.
And defenders of speculation do point out that at least some forms of speculation have beneficial effects. Speculators of the sort described in my first example above take on risk that others are unable to bear, and hence allow productive activity to take place that otherwise might not. They also add “liquidity” to markets by increasing the number of willing buyers and sellers. Speculators, through their investments, can also bring information into the market and thus render it more efficient. When one or more speculators takes a special interest in a given commodity, it is likely to be on account of some special insight or analysis that suggests that there will be an increased need for that commodity in the future. In other words, in the best cases at least, expert financial speculation isn’t idle speculation — it is well-informed, and informative.
Of course, it’s also worth pointing out that pretty much any technology or technique can be used for good or for evil. The techniques of financial speculation can be used to attempt to manipulate markets or to defraud consumers. Whether the dangers of such uses outweigh other considerations is up for debate.
But from the point of view of ethics, it’s worth at least considering exercising caution in some areas. Perhaps speculators with a conscience, for example, should be particularly risk-averse when it comes to commodities that have a very direct impact on people’s wellbeing, such as food. Recently Andrew Oxlade, writing for the financial website “ThisIsMoney”, asked Is it ethical to invest in food prices? As Oxlade notes, at least some critics believe that recent surges in food commodity prices have at least something to do with the activities of traders engaging in speculative trades.
Oxlade offers this advice to investors:
To sleep easier at night and still get exposure to this area, you may want to consider investing in farming rather than in food prices via derivatives. In fact, your money may even do some good.
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p.s. thanks once again to the organizers of the workshop mentioned above, namely professors Peter Dietsch and Stéphane Rousseau.
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Note also: If you’re interested in this topic from a professional or academic point of view, then this book should be on your bookshelf: Finance Ethics: Critical Issues in Theory and Practice, edited by John Boatright.
Ethics of Shoe-Shine Pricing
Filed under: decision-making, employees, marketing, pay, pricing, profits, wages |
Comments (6) 
A few days ago at the airport I stopped to have my shoes shined professionally, something I rarely do. The service was excellent. The guy doing the work was pleasant and knowledgeable, and the results were beautiful. The price, revealed at the end of the process: $6.75. I gave the guy a ten, and told him to keep the change. Now, that’s not exactly enough to make me think I’m a big spender, but it’s pretty good, percentage-wise (nearly a 50% tip). The guy sitting next to me did the same thing, by the way, and I’m betting that’s actually a pretty common pattern.
This got me thinking about the relationship between pricing, tipping, and currency denominations. If the price of the shoe-shine were $8.00, most people likely would still give the guy the same $10, resulting in a substantially smaller tip. But if the price were closer to $5, I bet most people would pull out a $5 bill and then looked for some change to add as a tip. So whoever sets the basic price for the shoe-shine has enormous power to influence the size of tips.
Now, the guy who shined my shoes was wearing a shirt bearing the logo of a chain of shoe care-and-repair stores, so I’m guessing he wasn’t setting his own prices. This implies that the company he works for, in addition to making a decision about his base pay, is also, through its pricing policies, making a decision that likely has an even bigger impact on his income. Of course, that decision is not entirely unrestricted. The company in question has to cover its costs. But presumably it has different pricing strategies open to it. Crudely, it can set prices high, which will likely keep demand down but will result in a big per-sale profit margin; or the company can set its prices low, and rely on volume. Either strategy might make economic sense. If (and that might be a big “if”) both strategies have the potential to work out equally well for the company, that means the choice is open, and the potential is there to base pricing on whichever strategy will do the most for employees in terms of providing customers an incentive for large tips.
(Another example: any bar manager that sets the price of a beer at $4.50 is pretty much ensuring that wait-staff are going to get lousy tips — the temptation for many people is going to be to plunk $5 onto the bar, resulting in a tip of 50 cents or 11%.)
But the factual foundation of this question, beyond my own anecdote, is all speculation on my part. I’ve never had a job where I relied on tips. Can anyone shed any light on the relevant facts, here? And does anyone know whether incentivizing tipping is something companies ever take into consideration in their pricing decisions?
Ethics of Profit, Part 2: Profits Unjustly Gained
This is the second in a 3-part series on the ethics of profit.
As I noted in the first in this series, profit is often subject to ethical criticism. But the reasons for that are not clear. To begin our analysis, we need to distinguish between the ethical evaluation of profit itself, and the ethical evaluation of the profit motive. The first 2 parts in this series are focused on profits per se. The next one will focus on the profit motive.
Our focus last day was on unjustly large profits. Today’s focus is on profits that are gained unjustly, regardless of the size of those profits.
There are several distinct circumstances in which profits might be said (by at least some people) to have been unjustly gained.
- Profits gained through exploitation. Under this heading, we might include the profits earned by drug companies that jack up the prices for life-saving drugs, or profits earned by tow-truck operators who cruise the highways during snowstorms, offering to rescue stranded motorists at exaggerated prices. I’ve blogged before about exploitation, and in particular about how hard it is to define. The big problem is that, generally, situations that get called “exploitative” involve none of the usual factors that make transactions unethical, factors like force, fraud, or deception. When we say that profits have been gained through “exploitation,” we typically mean that the situation in which such profits were earned were — in some vague way — unfair, but it is notoriously difficult to say just what is unfair about them.
- Profiting from vice. Under this heading, we might include profiting from legal sale of tobacco, alcohol, pornography, and sexual services. Many people think one or more of these ways of making a living are morally suspect. We might want to distinguish among different cases, however, including based on factors such as choice and information and power. The janitor at a cigarett company, for example, might be held less blameworthy than the company’s lawyers and advertising executives.. We might also include, under the general heading “profiting from vice,” things like doing business with bloodthirsty dictators.
- Profits from financial speculation. This one may strike some as odd. But there is a long history of suspicion with regard to those who engage in financial speculation, including especially things like short selling (which involves betting that the price of a stock will fall). After all, the speculator is essentially a gambler, and the sense that many people have is that such gambling is of no social value: speculators don’t build things, after all. And there are worries that speculators contribute to the growth of dangerous market bubbles. But defenders of speculation argue that speculators, unlike gamblers, do have beneficial effects. They add liquidity to markets, and their speculation, made visible by their investments, adds valuable information to the market.
- Unethical business practices. Here we have what is potentially an enormous grab-bag of business practices that constitute legal, but unethical, ways to make a profit. I tend to agree with Joseph Heath’s view*, that we should delineate the boundaries of this category in terms of what Heath calls (socially) “non-preferred competitive strategies”. Heath’s idea is basically that agressive competitive behaviour on the part of companies is generally a good thing (when, e.g., they compete by innovating and by seeking efficiencies), but their behaviour becomes fundamentally anti-social when they compete by using strategies that tend to make markets work worse overall (i.e., make markets less able to perform their social function of increasing social well-being). So the “forbidden” strategies here would include any attempt to profit from information asymmetries (e.g., by misleading customers), externalities (e.g., pollution) or monopoly. Profits gained in those ways may rightly be criticized.
We might add to this list the gaining of profit by individuals or institutions that we think ought, for various reasons, not make profits at all. For some people, at least, that includes government agencies and public universities.
Are there other ways in which profits (even small profits) can be unethical, ways that don’t fit into one of the categories above?
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*Heath’s argument about non-preferred competitive strategies can be found in his paper, “Business Ethics Without Stakeholders,” Business Ethics Quarterly, 2006 (Vol. 16, No.3).
Ethics of Profit, Part 1: Excessive Profits
Filed under: consumers, corporations, definitions, economics, ethics, finance, pricing, profits, trade |
Comments (5) 
This is the first of a 3-part series on the ethics of profit.
Is making a profit ethically good, or bad, or neutral? Or, better still, are there situations in which making a profit is either good, or bad, or neutral?
Profit is often the subject of criticism. The film, “The Corporation”, has as its main target not corporations per se, but the profit motive in particular. Michael Moore appears in the film, saying that while some corporations do good things, “The problem comes in, in the profit motivation here, because these people, there’s no such thing as enough.”
Now, the idea of profit is often tied up with money, with ‘filthy lucre.’ After all, everyone knows that saying about money being the root of all evil. But in the abstract, profit needn’t be defined in terms of cash. In the abstract, profit is just the “cooperative surplus” that results from a mutually-beneficial exchange. When I buy an apple (for, let’s say, $1) at my local market, both the owner of the market and I end up better off. We both “profit.” My own “profit” is the amount by which I value the apple over the $1 that I paid for it. And the market owner’s profit is the amount by which the sale price of $1 exceeds her own costs (apple + labour + overhead, etc.). And the fact that we both profit from the exchange is precisely what makes the exchange good for both of us.
Now, I think we need to distinguish between our ethical evaluation of profit, and our ethical evaluation of the profit motive. Because even if we agree that profit is generally OK, we can still worry about the things that people (or companies) will do in the pursuit of profit.
I’ll focus another day on the profit motive. Today I want to focus on profit itself. It seems to me that there are 2 kinds of circumstances in which profit itself is subjected (rightly or wrongly) to ethical criticism. One is when profits are excessively large; the other is when profit is gained unjustly. Today I’ll focus solely on the idea of excessive profit.
Several industries are commonly singled out as having unjustly large profits. One is the banking industry. Another is the pharmaceutical industry. Likewise, if we expand the category of “profit” to include individual profit in the form of salaries, then Wall Street is regularly singled out as a place where excessive profits are to be had. The fundamental ethical question with regard to large profits is what philosophers would call a question of “distributive justice.” Basically, is it fair that some people have so much money, while others in the world have so little?
A few points are worth making about big profits:
1) It’s worth remembering that very large corporate profits don’t necessarily translate into large amounts of personal wealth for anybody. Consider the fact that a company that has several billion dollars in profits — a lot of money, by anyone’s accounting — might have hundreds of millions of shares outstanding, spread across thousands (or even millions) of shareholders, and might pay out only a tiny dividend (say, a dollar per share). So a massive profit doesn’t necessarily translate into massive personal wealth for anyone.
2) Although many of us have intuitions that say that large disparities in wealth are unjust, it has proven incredibly difficult to translate those intuitions into anything like a coherent ethical theory. Despite our best efforts, we simply have no sound explanation of a) why it is that differences in wealth (fairly acquired) ought to be considered unfair, or b) just how large a difference has to be in order to be considered unfair. The lack of such a theory doesn’t negate our intuitions, but it should give us pause before we assert that particular disparities are “obviously” or “grossly” unethical.
3) It’s worth noting that what I referred to above as our “intuition” about injustice might also be referred to as a form of envy. And envy is far from admirable. As philosopher Anthony Flew once pointed out*, “this envy which resents that others too should gain, and maybe gain more than us, must be accounted much nastier than any supposed ‘intrinsic selfishness’ of straight self-interest.”
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*Anthony Flew, “The Profit Motive,” Ethics, Vol. 86, No. 4 (Jul., 1976), pp. 312-322
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Update: Part 2 of this series is here and Part 3 is here.
Utility Monopolies: Who Pays for Mistakes?
Filed under: consumers, corporations, energy, ethics, excuses, government, pricing, profits, shareholders, stakeholders |
Comments (3) Naturally, when any organization suffers unanticipated expenses, it’s going to have to find ways to make up the shortfall in its budget. That’s exactly what happened to Ontario Power Generation (OPG), the provincially-owned power company responsible for generating about 70% of all the power consumed in the Canadian province of Ontario. A legal battle with customers ended up costing the company nearly $20 million. So, where did the company turn to recoup that amount? Well, to its customers, of course.
Here’s the story, via the CBC: Ont. electricity rates expected to rise next week
Electricity ratepayers in Ontario, already reeling from soaring prices, should brace for more increases.
The Ontario Energy Board agreed Tuesday to let utilities raise rates to recover $18 million they paid in fines and legal costs after charging consumers excessive interest on late payments….
Now most companies could only dream of passing along such costs to their customers. Some might even succeed. But most wouldn’t. Most would be hindered by the fact that, if they raise the prices they charge to customers, customers would simply buy from someone else. But electricity in Ontario (as in most places) is a monopoly: an organization called Hydro One has a monopoly on distribution of electricity throughout Ontario, and the power it distributes is produced by a small handful of organizations, the most significant of which by far is OPG. So, with the consent of the Ontario Energy Board (the relevant regulatory agency) all OPG has to do is raise its prices, and the company’s customers end up paying for the consequences of its legal tussle with…the company’s customers.
I don’t know much about the original lawsuit, but I do know that this was a predictable result of it. And that puts customers of utilities in a strange position. Sure, customers can sue the a utility when they screw up, but all the utility is going to do is turn around and raise your rates to get the money back out of you.
Now, just to be clear, I generally have nothing against this sort of monopoly. Electricity distribution is what economists call a “natural monopoly.” It’s crazy to have multiple competing sets of power lines running down to street. And, for that matter, it might well be crazy to let many multiple competing companies all run nuclear power plants (OPG runs several of those). But at any rate, it’s worth recognizing the effect that this monopoly (or quasi-monopoly) situation has in the event that the company screws up (say, by overcharging customers). The expenses incurred are entirely likely simply to be passed along to their captive customers.
By the way, Ontario Power Generation (whose only shareholder is the government of Ontario) had a profit of $333 million for the 4th quarter of 2010.
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Thanks to NW for the story.
Death by Pizza Delivery: Domino’s Korea
Filed under: brands, employees, food, international, marketing, pay, pricing, workplace safety |
Leave a comment 
During most of the 80’s (starting in 1984), customers of Domino’s Pizza in the U.S. enjoyed the benefits of a catchy promise of speedy delivery: Domino’s promised to deliver your pizza in “30 Minutes Or It’s Free.” The only problem: soon after the slogan was introduced, a rise in deaths due to accidents involving Domino’s drivers was noted. The assumption was that drivers were facing pressure to make good on the promise, and were therefore driving faster, which meant they were more likely to have accidents, some of which were fatal. Lawsuits ensued. Big ones. As a result, the “30 Minute” delivery promise ended back in 1991, in the U.S. But apparently the same can’t be said for Domino’s Korea.
Here’s the story, by blogger Lee Yoo Eun, blogging at Global Voices: South Korea: Backlash After ‘30 Minute’ Pizza Delivery Death
A popular Domino’s Pizza marketing strategy promising pizza delivery within 30 minutes of an order has met with a public backlash in South Korea, following the deaths of several young delivery personnel.
The Young Union, the union For Occupational and Environmental Health (FOEC) and several labor unions held a press conference on 8 February, 2011, in front of Domino’s Pizza’s headquarters in South Korean capital Seoul, pressuring the company to abolish the ‘30 Minute’ delivery system….
Here’s another version of the story, from the Korea Times: Quick delivery jeopardizes drivers.
In often discuss the story of “30 Minutes or It’s Free,” as it played out in the U.S., in my business ethics class. I use the case to illustrate 3 key points:
- A simple business decision can have large and unforeseen consequences, ones that result in a major ethical challenge for a company. In this case, a simple (and frankly brilliant) marketing slogan resulted in Domino’s executives being called killers and the company facing multi-million dollar lawsuits.
- The ethical thing to do is not always obvious. We spend a lot of time chastising companies for bad behaviour, but in at least some cases it is genuinely difficult to know what to do. In the Domino’s case, my students are typically unified in the opinion that something had to be done to reduce the rate of accident-related deaths involving Domino’s drivers, but they’re typically deeply divided on a) how far the company needs to go and b) just what strategy they should adopt.
- Putting an ethical decision into action can be very difficult. Back in the late 80’s, there were several thousand Domino’s pizza franchises in the U.S., and tens of thousands of drivers. Any decision made by Head Office was going to have to be implemented by all those franchisees and acted on by all those drivers. Making that sort of thing happen is anything but straightforward.
As for Domino’s Korea — frankly I’m stunned to find out that the people in charge of the Domino’s brand haven’t done more to make sure that a lesson learned 20 years ago, at great expense, is reflected in their international operations.
Should Workplaces Ban Lotteries?
Filed under: employees, honesty, pay, pricing, profits, values |
Comments (10) Should workplaces ban lottery pools? Lots of offices feature “pools” of various kinds, with groups of employees joining together collaboratively or competitively to speculate on, e.g., the outcome of the NFL playoffs. Very likely lots of managers regard it all as harmless fun, boosting morale by giving employees a break from the tedium of their cubicle farms. But a lottery pool is unlike, say, a hockey or football pool. In a hockey or football pool, there are winners and losers, but typically the dollar amounts are pretty small. But when employees band together to buy lottery tickets, the possibility is there for all hell to break loose.
To see what I mean, take a look at this story, from the CBC: More claiming share of $50M lottery prize
Some of the claimants to the disputed $50-million Lotto Max jackpot were at the Ontario Lottery and Gaming prize centre on Wednesday being questioned about the win.
The original claimants — 19 Bell Canada call centre workers from east Toronto — validated the winning ticket on Monday, said OLG spokeswoman Sarah Kiriliuk.
But since then, several more people have come forward to say they should have a share of the prize, said Kiriliuk, although she refused to say exactly how many….
Clearly, this is an anxious moment for the winners. But it’s also surely a rather anxious moment for their employer, telecommunications giant Bell Canada.
My friend Andrew Potter (author of The Authenticity Hoax) suggested to me that there are at least a couple of reasons reasons why employers might legitimately choose to ban lottery pools.
The first reason Andrew suggests is the potential for a highly disruptive exodus of an entire group of employees in the event of a lottery win. Most people, when asked, say that the first thing they would do if they won the lottery is quit their jobs. Losing a good employee can be a bad thing. So what happens when a dozen or 20 employees win together, and very likely depart en mass? Clearly, employers have a significant interest in avoiding such an outcome. Of course, the odds against such a thing happening are, well, tiny…one in many millions. How tiny do they have to be for us to say that the employer would be out of line to try to prevent it?
Second, and I think more significantly, Andrew suggests that employers might have a strong interest in avoiding the possible legal troubles that could result from a group of employees winning a lottery. Even for a win much smaller than the $50 million win in the story above, there’s the chance that employees will come forward who say they were unfairly excluded for one reason or another. And with money on the line, lawsuits are far from unlikely. And when lawsuits happen, chances are that everyone is going to get sued, including the employer. After all, an excluded employee can reasonably claim that the employer was effectively hosting the lottery pool, and hence bears some responsibility for making sure that it is run fairly. Even if the dollar amounts are too small to result in lawsuits, I can imagine considerable disruption of the working environment when there’s disagreement over a lottery win. Just take the usual petty office grievances and multiply them by a few tens of thousands of dollars, and then a win for employees equals trouble for their employer.
Now, I’m not sure there’s a huge risk here, but I think it’s an interesting question. Obviously, it behooves employers to allow employees a little breathing room when it comes to lunch-break entertainment. In general, it’s good for employers to respect employees’ privacy and autonomy, and that might include the freedom to engage in things like office pools. For most of us, our employers already dominate our lives in ways that are at least sometimes regrettable, so employers should be cautious about imposing unnecessary constraints. But given that lotteries are already widely-criticized as a regressive form of taxation (or, more bluntly, as a ‘tax on the inability to do math’), it might well be that eliminating office lottery pools would be a reasonable move.
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Addendum: it’s a little-known and sad fact that a relatively high proportion of lottery winners eventually file for bankruptcy. [URL updated Aug. 2011]
Walmart & Free Shipping: Who Will Suffer?
Filed under: competition, consumers, CSR, internet, marketing, pricing, profits, retail, SME, strategy |
Comments (7) 
Once again, Walmart is making headlines with a business practice that will be good for its customers, and bad for its competitors. Here’s the story, by Stephanie Clifford for the NYT: Wal-Mart Says ‘Try This On’: Free Shipping
For years, Wal-Mart has used its clout as the nation’s largest retailer to squeeze competitors with rock-bottom prices in its stores. Now it is trying to throw a holiday knockout punch online.
Starting Thursday, Wal-Mart Stores plans to offer free shipping on its Web site, with no minimum purchase, on almost 60,000 gift items, including many toys and electronics. The offer will run through Dec. 20, when Wal-Mart said it might consider other free-shipping deals….
Not surprisingly, Walmart’s competitors are alarmed. Smaller on-line businesses don’t get the kinds of sweet shipping rates that Walmart gets from UPS and FedEx, and they don’t have the regional distribution centres that allow Walmart to keep its shipping costs low. It’s pretty clear that this move by Walmart is going to put serious pressure — maybe even fatal pressure — on some of its competitors.
Just 2 quick points to make:
1) It’s worth noting (for the benefit of those who don’t know) that Walmart’s profit margins are already razor-thin. Yes, the make big profits overall, but that’s due to their mind-bogglingly huge volume of sales. On a per-sale basis, their profit is very small. So the money for shipping a given product (for free) isn’t coming out of the profits on sales of that product — the profits just aren’t there. Something has to give. One possibility is that it really is a short-term gimmick, perhaps intended precisely to drive competitors out of business. That would potentially count as an instance of predatory pricing, which would be at least arguably unethical and potentially illegal — in spite of the short-term benefits to consumers.
2) Normally when we think about Walmart’s effect on competitors, we think about its effect on its very small competitors, the ‘mom & pop’ operations. But I wonder whether that’s the case here. I’m no expert on the structure of the industry, but it seems that the companies most likely to be hurt are Walmart’s large and mid-sized competitors, i.e., companies that occupy roughly the same strategy space as Walmart. It seems to me (and it’s just a hypothesis) that most small retailers will have significantly different business strategies than Walmart, and hence won’t be competing directly with Walmart in ways that would let them fall victim to this latest maneuver. If I’m right, then if Walmart really can sustain this free shipping policy (and they haven’t claimed they’ll even try to) it would be very bad for its medium-sized and large competitors. If that’s the case, will people have the same kinds objections as they tend to have when Walmart’s consumer-friendly strategies are instead bad for small businesses?
Pennies-Be-Gone: The Ethics of Rounding
The always-useful Consumerist brings us this story, with a self-explanatory title: A Lone Dunkin’ Donuts Sort Of Abolishes Pennies
One donut shop is taking a stand against the bacteria-ridden zinc disks of suck that are pennies. Reader Tom sent us [a photo of a sign] from a store he recently visited. In a policy change that was probably born during an 8 AM rush, this franchise appears to be are rounding customer totals up or down to the nearest five cents, and only providing pennies to those annoying people who actually want them….
Setting aside paranoia about pennies causing germs, what should we say about this policy, from an ethical point of view?
First, the efficiency argument is worth noting. Lines are annoying. Lining up (i.e., standing behind other people) to get something you’re anxious for (like coffee) is doubly annoying. Speeding things up is good. So, improving the efficiency of the payment system is good.
Second, it’s worth pointing out that the system intends to treat everyone equally. Every customer is subject to the same system of rounding. In principle, no customer is disadvantaged relative to any other customer, and indeed (importantly) the customer is not disadvantaged relative to the coffee shop. Round up or round down — it’s all just a matter of math.
Third, in practice, this system may not actually end up treating everyone equally. As one person (with the pseudonym “Pecan”) who commented on the Consumerist piece pointed out, regulars who buy the exact same thing every day are going to be either systematically advantaged or systematically disadvantaged. If their change is “supposed” to be 27 cents, they’re only going to get 25 cents — every time. If they don’t realize that, then they’re going to lose money, time after time, in a way that will add up. Clearly, it would take a long time to add up to an amount that most of us might care about, but it’s still worth noting.
Finally, it’s worth pointing out that such a system allows the coffee shop a new way of acting unethically. Not that the rounding is itself unethical — it’s not. But if accepted by customers, the rounding offers the shop the opportunity to set its prices so that, on average, it ends up rounding in its own favour more often than it rounds in customers’ favour. Prices that end in “8”, for example (such as $1.38) will always result in exact change ending in “2”. For example, a price of $1.38 results in 62 cents expected back from two dollars. When the exact change is an amount ending in “2”, that will always be rounded down to zero, resulting in 2 cents’ extra profit on every transaction. On low-priced items like coffee and donuts, that could mean a significant increase in the store’s profit margin.
Ethics and Economics (And Coffee Too)
A bit of economics can go a long ways in helping understand a range of issues in business ethics. I’m not an economist myself, but I’ve read a fair bit of economics here & there. And I want to read more. In order to arrive at sound ethical conclusions, you need more than just ethical beliefs: you need some understanding of how the world works. For many issues in business ethics, economics provides relevant facts.
For example, consider ethical issues related to price. Prices are clearly important to all of us: the price of a thing tells us how much we would have to pay to get it. But economists recognize that prices play two other very important social roles, roles that are important to the way the economy as a whole operates.
First, a price conveys information. When something is expensive, that tends to convey the fact that it is scarce — scarce enough that buyers are willing to pay a lot for it, and are perhaps even competing with each other and hence bidding up the price. Likewise, when something is cheap, that generally conveys the fact that it is plentiful. (Note that scarcity can be either natural, a straightforward matter of the amount of a thing in existence, or artificial, as when some person or company gains monopoly control over the supply of a thing.)
Second, a price provides motivation. People are generally (though unevenly) motivated by money, and by money-making and money-saving opportunities. (If you really don’t care about money, you should send me all of yours. Thanks.) Among those who want to buy a good, high prices tend to lower demand, and low prices tend to increase it. Price also affects suppliers. The fact that the price for a given good or service is high is going to tend to motivate people to want to get into that line of business. A low price is going to tend to deter people from making that their line of work.
Now, how does that understanding of the social role of prices affect a real-life issue in business ethics? Here’s a simple example of the social function of prices at work, and why economics matters for ethics. It’s an example I learned from the book, The Undercover Economist, written by economist Tim Harford.
Consider coffee. Coffee is a hugely important commodity — second only to oil on the world market. Most people know they now have the option of buying ‘fair trade’ coffee, the aim of which is to make sure that the people who grow coffee get a fair deal for what they produce. (October is “Fair Trade Month,” by the way.)
Hartord’s argument is this. Coffee farmers are poor, and will generally remain poor, because the thing they produce isn’t scarce. Coffee is relatively easy to grow, and can be grown in relatively many (hot) places. Buying fair trade coffee (at a premium price) means paying coffee farmers more. Now, recall what I said above about the role of prices in motivating people. Paying more for coffee is likely to draw more growers into the business. And drawing more growers into the business will increase the supply of coffee. And if you increase the supply of coffee, you inevitably depress its market price — and along with it the wages of those who labour on coffee plantations. So it’s hard to make coffee growers alone better off, until workers in other industries (like the garment industry) are well-enough off that they can’t be attracted into the coffee industry by (for example) fair-trade-driven higher wages. According to Harford (p. 229):
High coffee prices will always collapse, until workers in sweatshops become well-paid blue collar workers in skilled manufacturing jobs, who don’t find the idea of being even a prosperous coffee farmer attractive.
That makes it awfully hard, if not impossible, to boost net wages in the coffee industry, in the long run. Now, that by itself is nothing like a conclusive argument against fair trade coffee. But a sound understanding of the economic role of prices does give reason to pause before we accept the notion that we can make people better off simply by voluntarily paying more for a non-scarce commodity. (I’ve blogged before about other problems with the fair trade notion. See: What’s so Fair About Fairtrade?)
As I noted above, I’m not an economist — so if someone reading this can help by correcting anything I’ve written here, or add any further detail, I’d be grateful.
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Here are a few books about economics that I recommend (not all equally good, and I recommend them for different reasons). All of them are aimed at non-economists, and 2 of the 4 are even written by non-economists.
- Economics Without Illusions: Debunking the Myths of Modern Capitalism, by Joseph Heath
- The Undercover Economist, Tim Harford
- The Rational Optimist, by Matt Ridley
- Predictably Irrational: The Hidden Forces That Shape Our Decisions, by Dan Ariely
The Business Ethics Blog 