Responsa of the Week: Free Entry and Price Competition
A weekly series by Dr. Meir Tamari about responsa regarding business ethics issues.
In order to demonstrate the work of the halakhic system and its moral considerations regarding a variety of issues in business and economics, I will present a number of responsa drawn from the literature. These represent questions addressed either by laymen or by rabbis or communities to rabbinical authorities and their answers. They cover a period of close to 2000 years and reflect Jewish life in all the countries of the Diaspora. Even though the answers may vary and conflict with each other so that one cannot draw behavioral conclusions from them, they demonstrate Jewish thinking and values in this field.
Price competition, in many respects is like competition through free entry. However, it is much wider in that it includes local firms who are already operating in the market as well as outsiders who do not settle there but simply “export” their goods. The moral pressures and questions remain the same, viz the interests of the community in cheaper goods and services together with the increased profitability of the firms reducing their profits and in opposition the losses of less efficient ones or such as wish to maintain their present per unit profits.
Both of the following two responsa deal with the sale of liquor, which was a major economic activity of the Jewish economy in Central and Eastern Europe until the Second World War.
Unlike in Moslem ethical funds, there is in Judaism nothing morally or religiously wrong with Jews engaging in this trade per se; only the abuses of liquor constitute a moral problem. It is difficult therefore to decide at what stage the trade in liquor would become forbidden on the grounds of assisting people to harm themselves, lifnei iver.
QUESTION addressed to Rabbi Mordechai Ettinger, [Poland, 1804-63].
” A complaint was brought to me by the surrounding villages against the Jewish inhabitants of a certain city who had influenced the ruler to forbid the import of the cheaper wine supplied by the villagers.
The judgment is with the inhabitants of the city. After all, the producers of wine in the city have to pay a tax to the community (who leased the wine making facilities from the [gentile] overlord and then sub-let them for a higher fee), and it is this fee that makes their wine more expensive. In our case, the villagers have argued that according to the Sages in the Mishnah (Baba Metziah, chapter 4, mishnah 12) price cutting competition is allowed. Although the law is according to the Sages, in this case we cannot rule according to the majority [as is customary in cases of the majority against individuals], but rather according to Rabbi Yehudah who forbids it, even though it is the opinion of an individual. The ruling of the Sages only applies in those cases where one can say to the competitors, “If I can reduce prices [through greater efficiency or lower profit margins], so can you.” Here, however, the sole cause of the higher prices charged is the fee [tax] levied on the city merchants, who are therefore not able to reduce their prices to meet that of the villagers [who are not liable to this tax” (T’shuvot Ma’amar Mordechai, section 11).
That it is the public welfare that lay at the heart of the rabbinic discussion may be clearly seen from the comments on the Mishnah. Rashi adds there that the hoarders of produce will see that prices are falling and they will lower their prices accordingly, thus adding to the public’s welfare. The sages in the Talmud mention that even if the price- cutting causes a loss to the same shopkeeper, it is the public benefit that has to predominate.
An interesting perspective on pricing policy is shown by the following responsum of Rabbi Sopher, Hungary (1821-1886) that deals with price discrimination as a competitive tool. Price discrimination takes two forms, one in which some consumers benefit, the other discriminates against other suppliers. The former may be used to benefit certain groups, say members of the same religious or ethnic groups or even as a form of bribery when people such as policemen, government officials or politicians have access to lower prices. The latter by targeting certain areas or segments of the market, enable the firm to compete successfully in those areas; any shortfall in its profits is compensated by the higher prices in the other areas. This was common practice in the export policies of many countries, where the local market subsidized exports. In many countries both forms are illegal, as they disrupt the level playing field essential to free markets and open the gates to corruption and racism.
“The sellers of liquor in two villages complained that a competitor in a nearby village was selling at a lower price, thereby ruining their business.
If he is selling to all comers at the same price then it is permissible, provided that his lower prices are not ruinous [based on the principle that his competitors too can lower theirs to meet this competition]. However, he is forbidden to charge some customers a lower price and other buyers a higher price” (Machaneh Ephraim, Choshen Mishpat, part 2, section 46).
In addition to the legitimacy of price competition, the Sages were knowingly prepared to distort the market mechanism, in order to ensure that everybody has access to basic goods. This was done both through price control and by limiting demand.
” The courts are obligated to announce the fixed prices (of basic goods) and to appoint overseers [inspectors] for this purpose so that not everyone should earn what ever he wants. Luxury items such as spices are not subject to price control and everyone may earn what ever they wish” (Mishneh Torah, Hilkhot Mechirah, chapter 14, halakhot 1 and 2). Other codes include other items.
It is interesting to note that the Talmud rejects the alternative opinion of Samuel, that the efficiency of the market mechanism would force merchants to lower their goods prices in accordance with supply and demand, so that price fixing was unnecessary. Another Talmudic source tells us that, “the overseers flailed the merchants, saying, sell cheaply, sell cheaply.”
The edicts of the autonomous Jewish communities in different countries and at various periods, translated these halakhic rules into every day practice. Jews who violated communal price controls were liable to physical punishment, monetary fines or even excommunication, just as those who did not observe other communal ordinances. The concept of communal price control, while primarily applied to consumer goods, was sometimes expanded to goods and services other than these. For example the wages of marriage brokers [shadchanim], where the prospects of inter-family strife was very great and teachers, given our commitment to education. The fees paid to judges by the litigants and the profit margins from interest were also limited. “When the lender comes to claim his profit from the borrower, the judges are not permitted to allow him more than 20 gulden for each hundred gold coins. In the case of secured loans only 17 out of each hundred” ( Pinkas Vaad Kehilot Lita, enactment 712). “We have been made aware once again of the public outcry concerning the exorbitant fees charged by the judges, the fines which they take and the fact that they ask the fees twice (they were not paid a salary; once at the beginning of the case and once at its conclusion). So we have ruled that only at the conclusion of the case may they take 6 small coins. If, however, the litigants wish to each give one large coin they may do so. In no case, however, are they free to exceed this” (Vaad Arbah Aratsot, enactments 563 and others).
Halakhic intervention in the marketing of basic goods was not restricted to price control or to increasing the supply of goods. It is obvious that changes in demand can also lead to price changes so that declines in the former will usually lead to a reduction in the latter. So that there were halakhic injunctions to reduce demand, thus protecting the average consumer from artificial intervention in the supply of goods.
“The price of the pigeons offered by women after birth reached 1 gold dinar [by a cartel to take advantage of the market for this essential good and raising it far beyond their means]. Rabbi Shimon ben Gamliel [the head of the Sanhedrin, circa the last days of the 2nd Temple] announced on oath by the Temple, that he would not sleep until their price came down. He went into the Bet Din and taught that a woman who had 5 births is obligated to bring only one offering [and not 5 that the law required. This drastic change in demand led to a decline in price]. That very day it fell to a quarter of a silver dinar (one thousandth of a golden dinar]” ( Mishnah Keritut, chapter1, mishnah 7 ) This method of frustrating higher prices and output temporally by changing demand has continued to serve halakhic authorities throughout the ages. For example, “Where the monopoly of gentile fishermen, increased the price of fish for the Shabbat, it is correct to enact that the people should not buy fish for a few Shabbatot until the price comes down. It is true that there are some who have ruled that [in view of the need to provide for the mitzvah of Oneg Shabbat] it was only necessary in the case of a 33 percent rise in prices, but others have ruled that even in a lower price rise one should make such an enactment for the benefit the poor” (Mishnah Berurah, section 242, Hilkhot Shabbat. This enactment would mean that one wasn’t allowed to buy the fish; simply freeing the poor from their obligation would be counter productive, as all too often they would strain themselves to do like everybody else.
This column presents general principles for approaching business ethics topics. For specific guidelines, please refer to a halachic authority.
Dr. Meir Tamari is the former chief economist of the Office of the Governor at the Bank of Israel, and the founder of the Business Ethics Center of Jerusalem.