Are There Limits to How Much Profit Your Business Can Earn?
Running a (sheitel) business that's loyal to the laws of ona'ah can be stressful
Setting retail - and even wholesale - prices while also honoring your halachic responsibilities is complicated. And the implications of your pricing decisions extend deeply into the lives and livelihoods of entire communities.
I’m not going to even try to suggest a solution here. What I will do though is present the basic halachic background and then describe some theoretical scenarios to illustrate the key issues. I do hope to follow this article up later with some answers.
In any case, based on Vayikra 25:14 and Bava Metziya 49b, we learn about three cases:
A transaction whose purchase price diverged from the going rate by more than one sixth is automatically invalid and a full refund is triggered.
When a purchase price diverges from the going rate by a difference that’s less than one sixth, it’s assumed that both parties will forgive the difference.
When the difference is exactly one sixth, the sale is valid but the difference must be refunded.
I have no proof, but I assume that retailers don’t have to match each other’s prices to the penny. But there doesn’t seem to be any clear permission to diverge by a significant amount even though it's less than a sixth.
The Sefer Hachinuch (337) offers an underlying rationale for the halacha:
“It isn’t appropriate for people to earn money through deceit and lies.”
That suggests that the going market rate for a product is the fair price, and tricking someone into paying more (or accepting less) is dishonest.
That’s straightforward enough. But applying it to practical cases would require us to answer some tough questions:
How do we define the “going rate”?
Do service providers also need to charge at the going rate, or does this apply only to products?
Do “Lakewood” prices determine the going rate for out-of-town communities?
Do prices for identical items available through the internet count as part of the going rate?
What if two items aren’t quite identical?
What if the items are identical, but the conditions of the sale aren’t?
Do retail prices have to remain proportional to wholesale costs?
Here’s a scenario that’ll help us visualize what’s at stake. Imagine a sheitel business (which we’ll call HairBrained) that sells various lines of sheitels originating in both the US and China and provides sheitel services to its local customers. HairBrained is just one of a half a dozen similar businesses in town. Each local company has its own sets of suppliers, although there’s some overlap between them (i.e., some suppliers sell to multiple local businesses).
To keep things simple, we’ll say that HairBrained sells three sheitel lines, and that each line has three styles. Lines A and B both come from companies in Lakewood and the wholesale price for the cheapest style from both A and B is $1,500. Line C is a Chinese supplier whose cheapest style costs $400 wholesale.
To make things just a bit more interesting, we’ll say that the owners of HairBrained recently discovered that supplier A is giving them a wholesale price that’s 20% lower than what they charge the other local businesses. That’s a difference of $300 on the wholesale price of each sheitel.
The Chinese supplier (line C) sells the same products on the internet for $600.
Now, based on that information, here are some questions:
Assuming that HairBrained was the only business in town that sold Line B sheitels, are there any restrictions on what they’re allowed to charge over and above their wholesale costs ($1,500 for the cheapest style)? Assuming that the retail price doesn’t include any services - like cutting and styling - and covers just the sheitel itself, could HairBrained charge $5,000 for the sheitel? $10,000? Or must they stay within the range charged for similar sheitels (i.e., Line A)?
Are businesses allowed to alter their retail prices in ways that conflict with the ona'ah limits as long as they make minor changes to their products (a practice known as “product differentiation”)?
Is HairBrained allowed to charge a lower and more competitive price for the sheitels they get from supplier A that will reflect the 20% lower wholesale prices they’re getting, even though the other local companies are forced to charge 20% more? 20%, of course, is a difference of more than one sixth (which, in any case, isn’t the upper threshold for price divergence).
Is supplier A, in fact, permitted to charge different wholesale prices to some of its wholesale customers or are they, too, bound by ona’ah laws?
Considering that Line C sheitels (from China) are also available online, is the market rate now set at $600, or may HairBrained charge $1,000 or more?
On the other hand, assuming that the sheitels from China are of a comparable quality to at least some of what’s coming from Lakewood, is HairBrained required to sell the Chinese product for the same price as the comparable locally available sheitels? Remember: ona’ah forbids charging both too much and too little.
In the meantime, while I try to track down my own answers, I’m eager to hear your thoughts.