Retail Product Pricing and Halacha
Does halacha require the regulation of commercial activities? Who should make key market valuation and price control decisions?
The Torah is fine with business ventures that turn a profit. After all, why else would you go into business? But there are definitely limits to how much profit you’re allowed to charge. I’m going to see if I can at least partially define the practical application of one particular mitzva: אונאה - the Torah prohibition against price fraud. (See Vayikra 25:14.)
I’m primarily curious about how fair market value is set. In particular, who has the authority to decide what the going rate is for goods. How might the existence of parallel retail and wholesale channels (bulk, brand name vs. generic, trades discounts, co-ops, factory outlets, full-service retail, online, Amazon, grey market, etc.) impact the concept of fair market value?
UPDATE (December, 2023): This article describes my discovery that modern commercial practices have, according to contemporary poskim, rendered the laws of ona’ah largely irrelevant.
The basic rules as described in Shulchan Aruch Choshen Mishpat 227 are well known:
When an item is over or undercharged at a rate that's equal to a sixth of the market value, the sale is valid but the difference must be returned. When a difference that's greater than a sixth is charged, the sale is invalid and both the item and the full payment must be returned. It's assumed both sides forgive differences of less than a sixth.
Under normal circumstances, an unhappy buyer can only make a claim of ona'ah within the amount of time he would reasonably require to research the item's true market value (by showing the item to an expert). This suggests that halacha follows the practical and current reality on the street.
The ona'ah mitzva applies only to movable goods, currency, and clothing or tool rentals. Real estate sales or rentals or labor costs are exempt. Although some authorities (Tur and Rosh) rule that there is an upper threshold for real estate, but it’s a difference of 50% rather than a sixth. (227:29)
The mitzva doesn't apply to bartered items because there's no automatic assumption that people always value physical items equally (227:20).
Personal goods (someone's clothes or furniture) can be sold above ona'ah limits because it's obvious that the seller is only offering them because he needs quick cash. Although some say that's only true up to exactly a sixth. (227:23)
Changes to market value that occur subsequent to a transaction are not cause for action. Given how volatile market pricing can be, the burden of proof is on the side that claims market value did not change. (227:9)
This assumes that, when a complaint over a transaction is registered, we’re clear about the item’s correct price. But where does that clarity come from? The simple answer is that we trust the assessment of a local “expert” - although no halachic sources I’ve seen go into much detail defining such expertise.
There is however acknowledgement that even experts can make mistakes. The Shulchan Aruch (227:25) tells us how the decision of even a mutually agreed-upon appraiser can be overturned when it turns out that it missed the actual value. It would seem, therefore, that there is such a thing as an objective market value, and that we don’t blindly apply an individual’s opinion.
The Shulchan Aruch (231:28) does speak of an appointed official of significant wisdom ("חכם חשוב ממונה על הציבור") whose job it would be to regulate prices and commercial activity in general. In the absence of such an official, residents of a city may impose any price limits they wish and may agree to apply associated penalties. Similarly, trade associations may unanimously agree to any practical restrictions they like. (231:27)
Besides that, Shulchan Aruch (231:20) writes how:
"Bais din must appoint marketplace officials to ensure that no one profits without limit. Because no one should profit more than a sixth on basic commodities like wine, oil, and flour...This is true where there's a bais din everyone listens to. But if everyone else is charging higher profits, we don't require an individual to sell more cheaply."
In addition, wholesale sales of scarce basic commodities (specifically in Israel) are forbidden as they drive prices higher. Instead, each producer should sell directly to consumers. (231:23) Similarly, aggregating large volumes of basic commodities in mostly-Jewish markets anywhere on earth is forbidden. (231:24)
But none of that addresses price appraisal.
Here’s a very practical example to illustrate the problem. Suppose you successfully run a retail business selling prescription eyeglasses. How does halacha expect you to set your prices?
Your first instinct would be to look at your competition. But who is your competition? Is it the other retail opticians in town? Maybe. Or maybe not. After all, what about:
The optical labs at Walmart or Costco who might sell at a discount of 20%
The websites run by large brand name wholesalers who might offer 30% reductions
The online discount businesses that charge $25 for the same packages you sell for $200
Beyond that, how do we define competing products? Is it only identically branded items, identical items regardless of their branding, or products with identical functionality and durability regardless of their branding and finish?
Consider how nearly all frames - no matter how they’re marketed in the US - originate in one of a small number of Asian factories where you’d have to work hard to find a unit price over $20. “Functionality and durability” are pretty much unchanged from one retailer to the next. So, even within a single local market, how do we calculate “competition”?
The odds are that, in many cases, employing good will and common sense is all that’s expected of us. A bricks and mortar retailer would presumably be able to account for his rental, labor, and inventory management costs when calculating a fair price for his merchandise. But there are still some lingering questions.
For instance, do labor, shipping, and handling costs alone account for the 500% (and greater) markup differentiating high-end esrogim from their baseline kosher cousins (as we briefly discussed in “How Much Should a Chumra Cost?”)? How about designer clothing vs. Walmart?
In many cases, I guess, we could rely on the Shulchan Aruch (231:20) quoted above:
“But if everyone else is charging higher profits, we don't require an individual to sell more cheaply."
But even in such cases, you would still need to properly investigate the players in your market to confirm actual the real-world conditions. We do all want to do the right thing - not only for our businesses, but for our customers, too.