Thursday, 23 July 2015

Maximum Retail Price (MRP) | Origin, (Ir)Relevance

Why in news?
Relevancy being questioned.

Origin of MRP:

  • Printed on all packaged commodities that consumers purchase was introduced in 1990 by the Ministry of Civil Supplies, Department of Legal Metrology, by making an amendment to the Standards of Weights and Measures Act (Packaged Commodities’ Rules (1976).
  • Why did we introduce this?
    • It was meant to prevent tax evasion and protect consumers from profiteering by retailers. 
    • Meant to protect consumers in remote locations who do not have the choice to go to different stores in search of the right price. 
    • Eliminate information asymmetry and provides a benchmark to illiterate consumers. 
  • Before the amendment, manufacturers could print either the maximum retail price (inclusive of all taxes) or the retail price (local taxes extra). 
    • found that retailers often charged more than the locally applicable taxes. 
    • Thus, the amendment was made to introduce the compulsory printing of MRP on all packaged commodities.
Should it be continued?
  • While the intention to protect consumers in a pre-liberalised India can be lauded, continuing the system today does not make any sense. 
  • Why?
    • The practice of MRP in India is unique, archaic and dysfunctional. India is perhaps the only country in the world to have such a system, where it is punishable by law to charge a price higher than the printed maximum retail price. 
      • In most countries, the system of having a universally enforceable printed price is viewed as being akin to price fixing and is thus prohibited as being anti-competitive.
    • DYSFUNCTIONAL: In any case it's not working, so let's remove it!
      1. MRP applies only to commodities and not services.
      2. most essential commodities are not packaged and, thus, do not fall under the MRP rule.
        1. Fruits, vegetables, rice, pulses, and so on are always sold ‘loose’ and the retailer thus has the freedom to choose the price, based on his costs and the demand and supply for those commodities. 
      3. even packaged commodities are not usually sold at MRP. It is not uncommon to pay a price much higher than the MRP in movie theatres, high-end restaurants, tourist locations, airports and railway stations. 
      4. many shops charge for ‘services’ that are not covered by the MRP, for instance, you often have to pay a premium, a ‘cooling charge’, when you buy cold bottled water or soft drinks. 
      5. producers sometimes print an MRP so ridiculously high that the product can be sold at an actual price that is up to 90 per cent discounted, thereby making the printed MRP redundant in its ability to signal value. 
        1. Firecrackers and automobile spare parts are the most obvious example of this.
    • The onus of checking whether products are being sold at a rate higher than the printed MRP lies with the state legal metrology department officials. There have been a few instances of much-publicised crackdowns in various cities, but normally, it leads to rent-seeking among these officials.
    • creates retail price collusion. Thus, MRP often ends up hurting the very consumers it sought to protect.
    • Retailers in remote locations and in villages often have to bear high transportation costs, which they cannot pass on to the end consumer, since they are legally not allowed to charge a price higher than the MRP. They, therefore, end up making losses. In order to avoid this, they choose not to stock many products, thereby reducing the choice available to consumers in these locations. 
    • whether it should be the right, or even the duty, of manufacturers to set the price at which a product will be sold to the end user. In doing so, the manufacturer gets to decide the profit margins of the retailer, which is essentially contradictory to a free market system.
    • Just as a consumer has the right to buy a product at a particular price, the retailer should have a right to sell his product at any price. If he charges a higher price, the customer is free to go to another store. 
[Source: The Hindu]

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