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Pricing in Torah Law

 

Most countries in the world today have certain elements of price control—a policy of setting prices (usually a maximum price or price cap) by a government agency or regulatory authority. This is done for several reasons such as to ensure that basic goods and foods, such as bread and milk, are affordable even for those with limited means.

There is nothing new about such policies. As early as medieval times, bakers were subject to regulations which were supposed to protect the consumer. In England, a law was passed in the year 1266 for regulating the price of bread, and it remained in force for no less than 600 years. The price of bread was determined by adding a sum to the price of every quarter (320lbs. of flour plus water), to cover the baker’s expenses and profit. In exchange for this, the baker was required to bake and sell 80 4lb. loaves (or the equivalent).

The concept of price control and its effectiveness in a market economy has sparked vigorous discussion among economists. Some support it as a necessary adjustment of the free market, while others condemn it as a damaging aberration from the control of the market, which causes a range of unforeseen consequences.

In the present article we will discuss the issue of price control from the perspective of Torah Law. Does halacha see intervention in prices as a legitimate means of economic regulation? For what kind of good is a price cap worthy? Who is responsible for regulating prices? And are there cases in which halacha is careful that a seller should not lower prices? These questions, among others, are discussed below.

Talmudic Price Control

The Gemara (Bava Basra 89a) records a dispute concerning market regulation. All agree that the local Beis Din is responsible for appointing supervisors to ensure that weights and measures used in commerce are accurately calibrated. However, there is a difference of opinion concerning price control. According to Shmuel (who was considered an expert in monetary issues), Beis Din does not enact price controls. The Rashbam explains that the reason is that we rely on market forces to regulate the price: If one vendor sells for too high a price, customers will simply go to a cheaper vendor.

According to Rami bar Chama, however, Beis Din is responsible even for regulating prices. The Rashbam explains that we are concerned about those who manipulate the market in order to sell for an unfairly expensive price. (The Rashbam mentions those who sell employ different forms of deception to sell at an expensive price). The Yerushalmi likewise mentions that while Rav appointed supervisors for weights and measures alone, the Rosh HaGola (lay community leader) appointed supervisors for prices as well (and even imprisoned Rav for failing to do so).

How high a price is considered fair by the rabbis? The Gemara (Bava Basra 90a) writes (citing Shmuel) that a fair profit margin is a sixth (17%) above the cost price (besides the actual cost of the goods, cost also includes expenses plus the cost of work). This is the ruling given by the Rambam (Mechira 14:1) and the Shulchan Aruch (Choshen Mishpat 231:20): Beis Din must appoint inspectors to ensure that vendors do not make more than one sixth (or one fifth; see Shulchan Aruch Harav, Hafkaas She’arim 17, note 45). One who takes a higher profit is liable to be penalized by Beis Din in any way that the local rabbinic authority sees fit.

Only for Basic Foods?

The Rambam and Shulchan Aruch qualify their ruling, and note that the regulation of prices applies only to basic foods: foods that are related to chayei nefesh, a person’s basic sustenance. Which foods are considered basic?

The Rambam mentions wine and oil. Certainly, staples such as bread and nowadays milk will be included. Extensions beyond this are the subject of a dispute among authorities. According to some Poskim, any foods, including even spices, are included in the restriction on profit (this is implied by the Beis Yosef). Most opinions, however, agree that the restriction applies only to basic items, such as bread, oil, and wine, and perhaps also eggs and meat (see Sema 231:36; Shulchan Aruch Harav; Aruch Hashulchan 231:20).

The Rambam thus rules that, concerning spices and the like, a vendor can make however much profit he wishes, and there is no restriction on the price he charges. However, the Sema rules that a maximum profit margin of 100% applies to all food-related items, included spices and the like.

Concerning non-food items, such as clothing, dishes, perfume, and so on, Beis Din does not place restrictions on the profit margin a vendor is permitted to take. Provided there is no fixed market price, in which case the prohibition of onaah will apply (prohibiting selling the goods at a price one sixth or more higher than the market price), a seller is permitted to sell his wares at any price he wishes.

Nonetheless, several instances demonstrate that when prices were artificially raised, such as by cartels and monopolies, the Sages would take it upon themselves to break the cartel and ensure that normal prices are restored. We find this in the Mishnah (Kerisus 1:7) concerning the price of doves for birth-offerings, in the sale of haddasim for Sukkos (Sukkah 34b), and in the sale of pots after Pesach (Pesachim 30a). In these cases, even extreme measures are justified (such as the ban on purchasing fish to break a cartel that raised prices for Jews; see Shut Tzemach Tzeddek no. 28. The ban is discussed by the Mishna Berura 242, 2).

Effective Regulation

It is important to note that Beis Din will only regulate prices when the directives issued by Beis Din will be adhered to by local establishments. If only a minority of establishments will adhere to the rules imposed by Beis Din, there is no point in regulation, because the prices of most establishments will remain unchanged.

However, if most establishments comply with the directives of Beis Din, and only a small minority does not, Beis Din would enact the restrictions, because the lower prices of most establishments will inevitably force even the minority to cut their profit margins and lower prices (see Aruch Hashulchan 231:20).

Even where Beis Din does not enforce regulation on prices, an individual seller must still maintain profit margins no higher than one sixth. However, where there are several sellers who are selling at a higher price, there is no obligation for an individual seller to sell at a lower price than everybody else, if his actions will not be effective in lowering the general price.

Even where profit margins are not regulated, a Jewish seller should not sell basic goods at higher prices than his non-Jewish competitors. Shut Minchas Yitzchak (vol. 3, no. 129) was asked whether there is an obligation to buy goods from Jewish establishments whose prices were considerably higher than those of a non-Jewish chain store.

After discussing the obligation to prefer Jewish establishments over non-Jewish ones, his reply included the question of the Jewish store’s profit margins. If the Jewish establishment was selling for a price that contravened the Talmudic principles of price regulation, if follows that there is no obligation to buy there. Although the regulation is not enforced by Beis Din—today, the law prevents Batei Din from becoming involved in regulating prices—the principles still apply on an individual level.

Note that in the absence of rabbinic regulation, halacha recognizes the authority of regulatory bodies to control prices where necessary. Although the Gemara writes (Bava Basra 9a) that this public authority is contingent on the approval of the local rabbinic authority, Rav Shlomoh Zalman Auerbach (Shut Minchas Shlomoh 1:87) writes that since rabbinic authorities today are not involved in this field, it follows that there is no need to receive their approval for regulating prices.

Lowering Prices

The discussion above relates to ensuring prices are not too high. But do we also need to ensure that prices are not too low? Is it permitted for a store or establishment to drastically lower prices, reaching a level below that of all competitors? Do competitors have any halachic claim against somebody who wishes to do so, or can a vendor decide to sell for whatever low price he wishes?

The Mishnah (Bava Metzia 60a) quotes a dispute of Tanaim concerning this issue: According to Rabbi Yehudah, a store may not lower its prices beneath the current market prices. According to Chachamim, however, it is permitted to lower prices, and this is even recommended: he is zachur latov, remembered for the good.

The halacha, as ruled by Rambam (Mechira 18:1) and Shulchan Aruch (Choshen Mishpat 228:18), follows the opinion of Chachamim. It thus appears that there is no restriction on lowering prices.

Benefit of the Entire Market

However, this is far from the end of the story. The Gemara questions the logic of Chachamim—why is it permitted to lower prices? The Gemara, as explained by Rashi, explains that if one establishment slashes prices, this will lead hoarders to sell their goods and prices will stabilize at the lower price. The entire market, in the final analysis, stands to gain from the lowered prices.

Shut Panim Meiros (3:78 cited by Pischei Teshuvo 156, 8) understands from here that Chazal were not concerned for the pockets of buyers alone, but even for the financial viability of sellers. It is concern for rival establishments that led that Gemara to question the rationale behind the ruling of Chachamim, and the answer given is that rival establishments will not suffer a loss, because hoarders will unload their goods lowering the prices.

Following this line of reasoning, Shut Panim Meiros rules that wherever one store’s price-slashing strategy will adversely affect other establishments, it is forbidden to do so, even when consumers stand to gain. The gain of the buyer, in the eyes of the Panim Meiros, does not justify the loss of the seller.

Shut Gur Aryeh Yehudah (Choshen Mishpat no. 22), however, disputes the ruling of the Panim Meiros. In his view, Chachamim were indeed primarily concerned for the good of the buyers, and not for the losses of the seller.

As to the question of the Gemara concerning the ruling of Chachamim, Gur Aryeh Yehudah explains that the question does not address the ruling itself, but only the final words of the Mishnah, which state that one who lowers the prices is zachur latov. True, he might have benefited consumers, but why does he deserve this special blessing? The answer is that he benefits the entire market—both buyers and sellers. However, even when sellers stand to lose, it is permitted for one seller to slash his prices, because the good of buyers outweighs the loss of sellers (See also Or Sameich, Bava Metzia 60a).

The dispute mentioned above appears to have roots in a dispute among Rishonim. The Gemara (Bava Basra 22a) writes that salespeople of one locality are able to block the entry of competitors from another locality: each town and place is entitled to a mini-monopoly of its own townspeople. According to the Ri Migash (quoted in Rosh, Bava Basra chap. 2, no. 12), however, this law is restricted to cases in which the out-of-town competitors are not offering to sell for lower prices. If somebody from outside the town wishes to enter the town in order to lower prices, locals cannot block his entrance.

The Ramban (quoted in Beis Yosef, Choshen Mishpat 156), however, disputes this position, and rules that locals are permitted to block foreign competition even when the competitors wish to lower prices.

It seems that this dispute relates, as explained above, to the question of whose benefit we are concerned for. According to the Ri Migash, we are concerned for the benefit of the consumer alone. According to the Ramban, we must fear for the losses of sellers as well as the benefit of consumers.

Halachic Rulings

Many Poskim side with the opinion of Gur Aryeh Yehudah: Chazal’s main interest is for the good of the consumers, and it is therefore permitted to lower prices, even if this will cause other sellers a loss (see Beis Efraim 26-28; Divrei Chaim 18; Lechem Rav 216; among others).

Significantly, however, the Aruch Hashulchan (228:14) writes that it is only permitted to lower prices where this will benefit the entire market. If lowering prices will not be met by lowering the producer’s price, so that “the market will be harmed and others will lose income,” it is forbidden to do so. Competition, he writes, is generally healthy, but only when it is fair competition that competitors can afford.

Based on his explanation, it seems the Aruch Hashulchan will agree that stores can lower prices and offer occasional sale prices, where this is normal and where others can employ similar methods. It is only forbidden to do so where others cannot compete, so that lowering prices hurts the market and ultimately causes others to go out of business.

This is similar to the principle noted by the Imrei Emes (Choshen Mishpat 74), who explains that it is only permitted to lower prices when this will not cause others to go bankrupt (such as lowering prices beneath the cost price). This ruling is based on the ruling of Aviasaf (cited in Rema, teshuvos no. 10), which states that although competition is permitted, it is forbidden when it will cause others to go out of business. The consensus among Poskim is in agreement with this principle (see Beis Efraim, ibid.; Shut Chasam Sofer 61, 79).

The Sho’el U’Meishiv (1:1:20) rules that , an artificial lowering of prices, which is achieved by means of tax evasion, or by buying on a huge scale, or the like, is therefore forbidden, because it will not allow fair competition.

In conclusion, it is important to quote the Aruch Hashulchan (231:20), who writes that “we must reprimand those salesmen who sell their wares at overly low prices, and by doing so damage the market and cause much poverty.” He adds that it is permitted even for food sellers to earn a profit margin of one sixth, and that this applies all the more to other goods.

Public opinion is often swayed by the (understandable) wish to lower prices to a minimum. Yet, we need to remember that artificially lowering prices beneath their true market rate can ultimately cause much damage—to sellers in the short term, and to everybody in the long term.

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