Profiteering

 

Overcharge is an economic term that refers to the difference between an observed market price and a price that would have been observed in the absence of collusion. When collusion is not in use, such as by privately owned businesses, overcharge is considered as a markup of the observed market price for the sole profit of the business. It involves "tacking on" additional charges that cannot be proven.

A way in which profiteering is occurring in the country is through electronic means. Where a supermarket using the new gadget pricing tags on shelves can change the price without justification or consideration of the customer. I witnessed this in a local store whilst I waited for my hubby to choose a really delicious piece of meat the price tag began to blinker and in the next instant it went from R89 for item I was observing to R120 for the same item. No one had come to check the product availability and mark those that where old stock.

How to know if there is profiteering going on? When the cost of the item is divided by 2 and the out come of the price of the item is still higher than what it would cost to make then start looking for reasons. The reason could be the price of transport, local suppliers or a third party supplier.. A further hidden cost is wages.  For example bread. Bread consists of flour, yeast, eggs and water with other ingredients added for flavour but you need a baker to make it. So is the cost of a loaf reasonable at the moment. When the price is not reasonable start to look for cartel involvement. Cartels charge a seller of an item an extra cost equal to a bribe to trade. Often the cartel may receive free goods which have no reason for discount.

In a battling economy cartels thrive due to two reasons. The first being uncertainty as to what an item should cost and the second due to protection of sales.

An individual making an item for resale will be the first base price of that item but as that individual begins to occur other costs the price increases. The usual cost is item plus 100% for maker and then 20% to 50% for the reseller. The item costing R10 has become R30 with the maker getting R20 per item and the sales person getting R10. The further down the line an item is the higher the price but it can always be traced back. Now when a cartel steps in the price will shoot up by what the cartel demands. The overcharge rate is calculated by comparing actual cartel-enhanced prices to some competitive benchmark prices. A price-fixing overcharge is a transfer of income from buyers to the members of the cartel that occurs as a result of a collusive agreement. When a cartel achieves high levels of effectiveness (i.e., longevity, stability, and high overcharges), it tends to generate large customer losses in the form of loss of consumer surplus. This is calculated by analyzing the difference between what consumers are willing to pay for a good or service relative to its market price. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.

The second reason for a cartel to exist is to protect a business. By extracting a fee from the seller of goods the cartel will offer protection against thugs, new retailers wanting to get into the market and social forces. Effective cartels are also viewed as destructive of the competitive process in the sense that they weaken the natural effects of demand and supply in price formation and cause deadweight social losses. If one joins a cartel they are forced to pay an extra amount on the product they sell and this is paid over to the cartel. If this does not occur the cartel threatens the individual and violence can occur.

See Understanding Collusion



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