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A friend of mine is adamant that a business is legally bound to not exceed a "fair" price for an item or service based on the cost of materials and hours of labour used. He claims that businesses have gotten into deep trouble over it.

I told him that this was nonsense: even if one could argue that such a system were morally correct and/or beneficial to the economy, it would be impractical to implement.

I'm interested in the UK mainly but other countries are acceptable.

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Unless there is a law preventing you, you can charge whatever you like for your goods and services.

There are lots of laws that prevent you.

Just a short list, you cannot:

  • Charge more than the regulated price if you are in a price regulated industry (e.g. telecommunications)
  • Collude to fix prices
  • Form a cartel
  • Abuse your market power: this prohibits practices such as predatory pricing, bundling, etc.
  • Sell at a higher price than advertised
  • Profiteer to benefit from unexpected shifts in demand

However, assuming you are a normal business in a normal industry with a healthy level of competition (e.g. hairdresser, plumber, engineer, lawyer etc.) you can set your price anywhere you want.

  • Thanks for the answer and the links. Could you expand on "Profiteer to benefit from unexpected shifts in demand"? It seems common for businesses to change prices during expected shifts in demand after all. – Jambo Sep 18 '17 at 10:33
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    You can't start charging a hundred dollars for a litre of water after an earthquake renders your local water supply inoperable, or ten times standard price on a toll road when the only alternative is covered by a landslip for months. – Nij Sep 18 '17 at 10:38
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    There is also an exception for unconscionable pricing which usually happens when someone charges far more than the going market rate to someone who is vulnerable in some respect (e.g. developmentally disabled, fearful of having immigration status exposed, doesn't speak the local language, locked into dealing with the vendor contractually, etc.). But, unconscionable prices are gauged relative to the market not to the costs of production. The usual remedy is to rescind the sale. – ohwilleke Sep 18 '17 at 16:59
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It is somewhat true. There are limits on prices of pharmaceuticals (Health Service Medical Supplies (Costs) Act 2017). There is also Article 102 of the Treaty on the Functioning of the European Union:

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions...

Prices (high or low) fall within the ambit of unfair trading conditions. See the case of United Brands:

charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be such an abuse.

As spelled out in this article, one of the tests for this is is "the price-cost margin is excessive". However, the premise was that somehow a scientific definition of "unfair price" would be possible, but has not materialized. Note that this restriction applies to a concern in a dominant position, so a company with 1% of the market probably would not be subject to price-cost margin restrictions.

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