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Truth in Pricing Is a Worthwhile Goal

November 15, 2003|Sherman E. DeForest | Sherman E. DeForest is a physicist in Carlsbad.

While driving the other day I caught a snippet of a piece on the radio that mentioned "price transparency." Although I heard only a few seconds, the idea sounded great.

As I interpret it, transparency is simply reporting to consumers how much various elements contribute to the price of an object. For instance, if you buy a car, how much of the sales price goes to the chief executive? If you buy a share of blue-chip stock, how much goes to the New York Stock Exchange chairman's retirement? Suppose the recording industry association harasses teens for copying music. OK, how much of the price of a CD goes to the artist? How much goes to the CEO of the record company or the industry association?

Transparency sounds real good to me. We could enact it in federal law with defined categories of required transparencies. Appliance manufacturers already are required to post energy usage and probable cost to operate new refrigerators. Automobile manufacturers are required to post expected mileage.

In the future, pharmaceutical firms might be required to report what fraction of the cost of a pill goes for legal fees to extend patents beyond reasonable times, or marketing expenses such as wining and dining physicians.

This is not a novel idea. Transparency in a perverse form is widespread. Retail stores quote prices for purchases and then add sales tax at the end of the transaction. But the price of the object is the total paid for it, including all factors. Sales tax is the responsibility of the seller, not the buyer. Sellers simply make this part of the cost transparent while hiding a breakdown of the rest of the cost.

This type of transparency is universal because it makes the cost of merchandise seem smaller than it is. To say that you buy something for $1 and then pay an additional 7% as tax is a fib. The actual price is $1.07. An example of what I call "reverse transparency" is foisted on us in spades when we buy houses. How much did the salesperson say the house cost, and how much did you actually pay? "Oh, those extra charges were not part of the price. Those are required fees." Fees are all part of the true cost.

Imagine a day in the future when you buy a car for $10,000 and hear the salesperson say, "Oh by the way, we have to add on the $5,000 CEO fee, and the $3,000 upper-management fee, the $3,000 lobbying-government-for-favorable-treatment fee and the ... " Between two equivalent products, a person might prefer the one in which more was spent on quality over one in which more was spent on advertising or management perks.

Unions are engaged in a major strike against food stores over proposed cuts in health benefits. The stores say they must keep down labor costs to be competitive. Do you have any idea of what fraction of your food bill is due to the checker and the checker's health benefits? Suppose the total cost of the food workers' health benefits to your food prices was a fraction of the salaries and benefits paid to management, or the CEO. It might or might not change your opinion on the strike, but wouldn't you like to know? What would be the effect on your food bill of doubling the strikers' benefits? What would be the effect of halving them? How does this compare with cutting top management salaries by 10%?

Without transparencies, we argue the points because we simply don't know. Management prefers it that way, and when someone doesn't want you to know the truth, it's generally because the truth would help you and hurt them.

Of course, maybe transparency wouldn't have much of an effect on shoppers' habits. Cigarette packages have scary warning labels and people still buy cigarettes.

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