Price Discrimination in Islam

Assalammualaikum....

this is one of my assignments that i will share with others.... hum, quite incomplete i would say.. i would suggest those who are searching about this to read the following sites/books..

ECONOMIC JUSTICE IN ISLAM by Dr. S. M. Yusuf
Published by: Nusrat Ali Nasri for Kitab Bhavan
1784 Kalan Mahal, Daryaganj
New Delhi- 110002

ENCYCLOPAEDIA OF ISLAMIC ECONOMY
Business and Trade in Islam- 2
Edited by: Muhammad Moinuddin Khan, Dr M. H Yusuf
Published in India by Pentagon Press
ISLAM FROM THE PROPHET MUHAMMAD TO THE CAPTURE OF CONSTANTINOPLE
VOLUME II: RELIGION AND SOCIETY
Edited and translated by Bernard Lewis
Published by Oxford University Press

PRICE DISCRIMINATION FROM ISLAMIC PERSPECTIVE

            Price discrimination from Islamic perspective seems to be a complicated topic for me to discuss and to dwell on since I cannot find a reference that discuss about this topic in a broader sense. Thus, I am trying to put my own thought about this topic. It is a good strategy to briefly explain about price discrimination from conventional point of view before as too grab the idea of it and try to compare it in Islamic perspective.

            Basically, the theory of price discrimination is originally come from the theory of monopoly[1] and its objective is to capture consumer surplus and transferring it to the producer as additional profit (basic objective in pricing strategy).[2] The meaning of price discrimination is Price discrimination or yield management occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs[3]. Price discrimination is divided into two situations namely, direct price discrimination and indirect price discrimination. I am more concern to discuss about the former (direct) rather than the latter (indirect), which consists of first degree price discrimination, second degree price discrimination, third degree price discrimination, and two part tariff. However, in certain cases, only first degree and third degree price discrimination are considered as direct price discrimination.

            Price discrimination can exist when three conditions are met:

1-      Consumers differs in their demands for a given goods and services

2-      A firm has a market power (which means, the firm is not a price taker)

3-      The firm can prevent or limit arbitrage

All these conditions can be found in the market of imperfect competition such as monopolistic competition, oligopoly and etc. Apart from these criteria, I would to suggest another criterion which indirectly leads to a firm in practising price discrimination, which is the imperfect information or inadequate knowledge from the buyer side in a market. Due to the negligence from the consumer side to get the information has given the trump card to the firm.

            There are some advantages and drawbacks of price discrimination in market that will be useful in doing my comparison between conventional and Islamic point of view. The advantages of doing price discrimination are:

1-   Firms will be able to increase revenue. This will enable some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off peak.

2-      Increased revenues can be used for research and development which benefit consumers

3-      Some consumers will benefit from lower fares. E.G. old people benefit from lower train companies, old people are more likely to be poor.[4]

4-      Consumers have many choices in buying a product if we take into consideration the indirect price discrimination.

5-      The deadweight loss can be minimized in certain cases such as in perfect first degree price discrimination.

While, the drawbacks of permitting the price discrimination are:-

1-      Some consumers will end up paying higher prices. These higher prices are likely to be allocatively inefficient because P > MC.

2-      Decline in consumer surplus.

3-      Those who pay higher prices may not be the poorest. E.g. adults could be unemployed, OAPs well off.

4-      There may be administration costs in separating the markets.

5-      Profits from price discrimination could be used to finance predatory pricing.[5]

6-      Being unjust with other group of consumers in price of goods and services.

7-      Leads economy to run inefficient as the price charged differently which we know that the money receive from another group can be spent in buying another goods and services in market.

I will try to explain the last drawback through this situation as I cannot present my idea in the concise way. Let assume that we are using third-degree price discrimination – practice of dividing consumers into two or more groups with separate demand curves and charging different price to each group. Rather than using my own idea that I am afraid might end up confusing everyone, I will state the example as outline in textbook:

“A well known liquor company has what seems to be a strange pricing practice. The company produces a vodka that it advertises as one of the smoothest and best-tasting available. This vodka is called “Three Star Golden Crown” and sells for about $16 a bottle. However, the company also takes some of this same vodka and bottles it under the name “Old Sloshbusket” which is sold for about $8 a bottle.[6]

The additional charge of $8 in “Three Star Crown” can be used to consume another goods and services in the market instead of wasting it for a vodka that is same with “Old Sloshbucket”.

      Since my interest is to discuss this matter from the Islamic point of view, I just provided some general outline about the price discrimination from conventional point of view. Does this price discrimination is valid in Islam? I cannot provide an exact answer about this question since I am still in the state of learning. However, for me, personally the price discrimination brings more harm than benefits. Before we dwelt on about this topic, let us understand how pricing should be done in Islam.

“The Holy Prophet pbuh said: Allah (swt) is the one who fixes the prices, who withholds, who gives lavishly and who provides. I hope that when I meet Him, none of you has a claim against me for any injustice with regard to blood or property.” (Ahmad)[7]

      Based on the above hadith, the basic pricing system is established. In Islamic economics, pricing is based on two criteria namely; justice and market determined where supply and demand interaction creates the price of an economic goods and services. These basic rules of pricing are introduced or I can say agreed by most of Muslim scholars.

      According to Abdus Samad, a PhD candidate from Department of Finance and Economics, Utah Valley University, in his paper titled of “Market Analysis from an Islamic Perspective and the Contribution of Muslim Scholars”, he mentioned that, The practice of price discrimination—selling the same goods at different prices to different customers—is considered equivalent to exploitation or riba. As such, such practices are prohibited in Islam. Some Islamic scholars, however, argue that the practice of selling certain goods and services such as baby milk to poor parents (rural market) at a lower price as opposed to selling the same baby milk to well-off parents (urban market) at a higher price to maintain a normal profit might not be inconsistent with the Islamic principle of welfare.[8]

      Since Islam prohibits monopoly trade due to various harms in its market and the consumers are the one who is affected most in that situation. Thus, we see that, monopoly has taken away the welfare or social benefit of a consumer and give a burden to consumer by imposing higher price than marginal cost.

      The majority opinion, which is also most in line with the aims (maqaasid) of the Sharee'ah, is that the prohibited monopoly is one that inflicts harm on people and makes it difficult for them with the monopolist's intention to sell when prices soar, and at the highest possible price. Whoever does this would be considered a monopolist, and his deed is unlawful.

Imam Maalik said: "Monopoly occurs in everything, including food products, jute, woolen or safflower products and the like; whatever, if withheld, would harm people, the withholder should be prevented from so doing, but if he is not harming (consumers) or their commerce, there is nothing wrong with it.

Imaam Yahya an-Nawawi said: "The wisdom behind prohibiting monopolistic practices is to prevent the harm that would befall people as a result. Scholars are in agreement that if a person possesses items that people are in dire need of, and they can not find anyone else to supply it, he is to be forced to sell it in order to lessen the harm and remove difficulty from people."[9]

      In conclusion, I am in a view of disagree with the price discrimination and more prefer price which determined by the interaction of market. As the price is the major determinant in consumption, if the price is market determined that is firm is price taker, we can see a lot of competitive firms interact and consumers have a choice to choose. Apart from that, due to competitive market, firms will become more creative in creating a product and in the long term, economy will growth substantially.

 *as we can see that the drawbacks out weight  the advantages. additionally, price discrimination seem to benefit firms which following the objective of maximizing profit rather than thinking about social benefit and social cost..

this topic need to be discussed in detail..and i am hoping that someday, there will be someone whom will revive back Islamic Economy. and i also hoping that i am one of those people....

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[1] http://www.mcafee.cc/Papers/PDF/ABAPriceDiscrimination.pdf  retrieved at 1.15a.m on 20 March 2011

[2] Microeconomics 7^th edition (page 391) by Robert S. Pindyck and Daniel L. Rubinfeld

[3] http://tutor2u.net/economics/revision-notes/a2-micro-price-discrimination.html  retrieved on 1.15 a.m. on 20 March 2011

[4] http://www.economicshelp.org/microessays/pd/price-discrimination.html (from 1st advantage until 3^rd advantage) retrieved on 1.15 a.m. on 20 March 2011

[5] IBID (from drawback 1 until 5)

[6] Microeconomics 7^th edition (page 397) by Robert S. Pindyck and Daniel L.Rubinfeld

[7] Modern Financial Transactions under Shariah by Mohd Ma’sum Billah (page 121)

[8] Retrieved from http://www.ibtra.com/pdf/journal/v4_n3_article4.pdf  on 20 March 20, 2011, 2.08 p.m

[9] http://www.islamweb.net/emainpage/index.php?page=articles&id=164929  on 3.27 p.m at 20 march 2011