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Global Jesuit Dialog on Business Ethics

Global Jesuit Dialogue on Business Ethics

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The Issue of Price Cutting

Thursday, Feb. 28, 2013

Background

The increased competition among the Cement dealers in Kerala (India) has resulted in many of them selling cement at a lesser price than the stipulated market price. The intense price cutting has been worrying the cement companies and the KCDA (Kerala Cement Dealers Association) as it negatively affects the market price of cement and also the profit margin of the dealers. This has also resulted in unhealthy competition among the dealers. After many discussions and trials, the KCDA and the cement companies have arrived at a conclusion that they’ll suspend the dealers, for a stipulated period, if they are caught in price cutting. This decision has been able to bring things under control to a certain extent.

However, the rule breakers have started finding their way out to beat the system. They do not mind running the risk of a suspension as the punishments currently in place are not stringent enough. Some of the dealers use false proofs with which, the chances of getting caught are bleak. Some of them negotiate with the customers and promise them to give them the cement for a lesser price, provided they keep it a secret. Some of them promise the customers to give huge discounts on other items they buy. Due to many such issues, which are beyond control, the company and the association have not been able to bring in a fool-proof system. This is making the life very difficult for dealers who are ethical. Furthermore, the rule breakers end up making undeserved profits. Hopelessness in finding a fool-proof solution has forced some dealers who are ethical to take up unethical ways.

My view

As it is difficult to make the system fool-proof and as it is hard to bring proof against the offenders, the KCDA and Cement companies should make the punishments harsh. In the present scenario, if a dealer breaks the price limit and sells a cement brand say ‘xyz’ to a customer, he is suspended from selling only the brand ‘xyz’ for 3-7 days. However, this does not affect him much as he still has the freedom to sell other brands. So, I feel that if a dealer is caught for price breaking, his minimum suspension should be for 2 weeks and he should be suspended from selling all the other brands. Repeated offence should attract punishments as severe as dismissal. Fear of harsh punishments would force many dealers to refrain from indulging in such unethical practices. KCDA and companies should also look at identifying (though it is very difficult) and rewarding those following ethics, since rewards are more influential than punishments (Trevino and Youngblood (1990)).

This ethics case was written by Skaria Ephrem, a student at Loyola Institute of Business Administration, Chennai. 

Comments Comments

Alexis Babb said on Mar 7, 2013
If I understand the case correctly, cement companies are significantly underpricing their product, resulting in unhealthy competition. KCDA should take a stronger stance in regulating these "unethical" dealers (e.g. selling and issuing permits, licenses, etc). Rather than impose "punishments", which are not strong enough for them to even obey, this regulating agency should incentivize and reward the behavior of ethical dealers (e.g. contracts with local government, non profits, and other companies they have a strong relationship with. - Like - 2 people like this.
Saayeli Mukherij said on Mar 8, 2013
My question relates to the execution of these punishments. Do you believe if the punishments are strict that there will be bribes to compensate for elevated level of strictness? Furthermore, how would one one be able to reward the strong ethics of a certain supplier? Is there a fair practices lobby group that could give a certification, which could lead to higher customer demand? - Like - 2 people like this.
Noah Rickling said on Mar 8, 2013
This seems like a complicated problem. The unethical businesses have found loopholes that have effectively isolated the ethical cement dealers from customers. I think that Saayeli idea of a fair practices certification could create some credibility for ethical businesses. This rewards ethical businesses by showing customers that they are following all the proper rules and regulations put in place. This system has worked for coffee suppliers in the United States. There is still a problem with this in the U.S., but to a much lesser extent. Coffee suppliers were exploiting coffee farmers in South America and elsewhere creating a bidding war for the lowest price. In order to compete and make a living, these coffee farmers were forced to lower their prices in order to sell any of their crop. They were being completed exploited by large coffee importers who raked in large profits at their expense. Then a fair trade coffee certification was made and given to suppliers who did not participate in this exploitation of coffee farmers. Customers in the U.S. now spend more money in order to buy coffee that is "fair trade coffee". By giving a certification to cement dealers, customers could be inclined to buy from ethical cement dealers. This would create a demand for fair trade cement. That means that customers who are in need of concrete walls/streets/etc will look for "fair trade cement" in order to be looked at as an ethically responsible company. It is good for their business by building the integrity of their brand and it is also good for the ethical cement dealers who will see their sales increase. - Like - 2 people like this.
Noah Rickling said on Mar 12, 2013
Skaria, Could you also give a bit more background regarding the KCDA and its recent history. Why did the KCDA come about? Who gives the KCDA the power to set prices? Why exactly do they have that power? - Like - 5 people like this.
SIRAJ said on Aug 15, 2013
I CONGRATULATING YOU , TO DUN A AT KERALA CEMENT INDUSTRIES & KCDA .in kerala KCDA and ALL THE PRIVATE CEMENT COMPANY have an anticompetitive Agreement.Because of this Company are increasing the cement price with the support of KCDA and they are Sharing the profit, i hope every month they Earning cores of rupees because of this anticompetitive agreement,one more thing is that right now in kerala any one need an dealership from any private cement company , the company demand KCDA RECOMMENDATION LETTER ,this Letter KCDA Issuing only After getting donation FROM THE PARTIES IT WILL BE 25000,50000 etc. the most important thing IS THAT all this happens in our Gods own kerala - Like - 4 people like this.
Naveen Krishna said on Aug 29, 2013
Forum accused of using strong-arm tactics ------------------------ Staff reporter THE HINDU ------------------------ Kozhikode:- The Kerala Cement dealers association has been accused of using strong-arm tactics to put pressure on dealers who are not members of the association. At a press conference here on Monday, K.M.Chakrapani, a cement dealer from Vadakara,alleged that the association pressured a cement manufacturing company to stop supply of cement stocks to his dealership. NORTH KERALA ------------ He said the association has been holding sway over the North Kerala region,and making life difficult for the dealers who refused to join as members. Strict action ------------- Mr.Chakrapani urged the government to take strict action against the illegal methods of the association. (A report seen : THE HINDU (Kozhikode, Tuesday, July 2,2013 (page-3) - Like - 6 people like this.
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