Fixed Maximum Retail Price: Disadvantages for Retailers and Consumers

Fixed Maximum Retail Price: Disadvantages for Retailers and Consumers

Question : Fixed maximum retail price hurts interests rather than serving them. Discuss.

Fixed maximum retail price is a dysfunctional mechanism which hurts retailers as well as consumers

About MRP

- MRP was printed on packages introduced by consumer purchases in 1990 by the Ministry of Civil Supplies, Department of Legal Metrology through an amendment to the Standards of Weights and Measures (Packaged Commodities Rules) Act 1976

- MRP was meant to prevent tax evasion and protect consumers from profiteering via retailers

- Prior to the amendment, the MPR or Retail price could be printed inclusive of taxes or with extra local taxes.

Disadvantages

- It was found that retailers changed more than locally applicable taxes

- Amendment was made for introducing compulsory printing of MRPs on all packaged commodities

- Practice of MRP in India is unique, archaic and dysfunctional

- India is the only country to have a system punishable by law to charge prices higher than maximum retail price

- In many countries, system of universally enforceable printed price is akin to price fixing and therefore anti-competitive

- Rule of MRP is breached, not honoured

- MRP applies only to commodities and not services

- Most essential commodities are not packaged and do not fall under MRP rule

- Fruits and vegetables are sold loose and retailer has freedom to choose the price, associated with cost and demand and supply for commodities

- Even packaged commodities are not sold at MRP usually

- In several settings, such as movie theatres and restaurants, prices much higher than MRP are charged

- Many shops charge for services not covered under MRP

- MRP are so high that product can be sold at actual price up to 90 percent discounted making printed MRP redundant in ability to signal value

- MRP is the focal point for retail price collusions

- Retailers in remote locations often bear high transportation costs which cannot be passed onto the end consumer as they are legally not allowed to charge prices higher than MRP. Therefore, they end up making losses

- An important defence for maintaining the MRP system is that it eliminates information asymmetry and provides a benchmark to customers who are not literate. With increasing penetration of internet enabled smart phones. apps can easily collate prices eliminating this benefit of MRPs

- Most of the malls and supermarkets offer attractive discounts on the MRP which make it difficult for small time retailers to compete with them.

Facts and Stats

- Retail density in India is high enough for market mechanism to function effectively as the OECD 2007 India report notes

- Even in places without high retail density, if high prices are charged by retailers in absence of MRP, other retailers will enter the market leading to price reduction