In the world of business, the role of the component ‘price’ is of utmost importance. No matter the amount of marketing effort or promotional campaigns, if buyers are not comfortable with the price, they will simply never buy it. On the other hand, if the market offers a lower price for a product, sellers will be discouraged from producing.
As a result, they will stop making the product. Therefore to keep both sides happy and achieve a win-win situation, there is something called ‘equilibrium price’ of every product. Determined by the market forces of supply and demand, the equilibrium price is accepted by both buyers and sellers and transaction takes place at this price.
However, not all dealings happen directly between the buyer and seller. Often, there is a third factor known as the ‘middlemen’ who take the quote from the seller, raises the amount for keeping as his income and quotes a final price to the buyer.
So, if the seller sells at $100 INR, the buyer ends up paying 150 or 200 INR. It mainly happens because the buyer is not aware of the real prices and hence fails to comprehend the price given the quality of a product. As buyers depend on these middle factors, they end up paying a higher amount, which means there is no price transparency.
Price transparency refers to a situation where both buyers and sellers have the proper understanding of the real market price and can understand the rationale behind the pricing.
Price transparency is a common feature of the free market economy where the market is allowed to operate freely, without any interference and the market forces, i.e. supply and demand determine the price. Thus, in this condition, the presence of middlemen is not required. Moreover, buyers and sellers can compare different prices and make an informed decision about the price.
The advent of Internet has further given a boost to price transparency. People, from any corner of the world, can check market prices and take independent decisions about prices of various products and services.
Role of Price Transparency
1. Promote Competition
When buyers are aware of the real market price, they develop a bargaining power. This leads to the steep rise in competition among the sellers, who strive hard to establish their uniqueness and branding in the minds of buyers. Thus, customers get exposed to a lot of choices and can take proper decisions on pricing.
2. Encourage Buyer-Seller Interface
Another important function of transparent prices is that it enables direct producer-customer interaction and gives an open space to bidding and bargaining. With no middlemen, the two sides discuss various prices and finally come to conclusion at one price.
Both the above instances can be exemplified through the instances of hawkers. Hawkers are present in the large number (many suppliers for one product, therefore competition) and customers spend a lot of time to arrive at the right price by directly bargaining with the seller.
3. Realize Equilibrium Price
In free market economy, neither the buyer nor the seller has a hand in deciding the price. It is, therefore, the market forces which brings the duo at an equilibrium point for any product. Price of a product at this point is viable to both sides. With price transparency, a market is sure to devise equilibrium price; thereby striking a balance between supply and demand.
Advantages of Price Transparency
1. Common Bid Pricing Knowledge
In a price transparent economy, both producers and customers have the complete idea about all the bid prices. They can also inquire of the prices and enjoy a free hand in trading quantities of a certain stock or commodity, at any given point of time.
2. Safe and Secured Dealings
Fair and transparent pricing reduces uncertainty in deals. By eliminating middlemen, price transparency paves the way towards a value-for-money approach and enables buyers to pay the exact amount for the quality of their product.
3. Establish Value and not just Prices
Price of any product also tells about its quality. Therefore, when buyers look for the market-driven price of any commodity, they also cater to its value as there lies an inherent relationship between the price of a product and its corresponding quality. With this, buyers definitely get an idea about the right price, but more specifically they learn about the quality and value benefits of the product.
4. Good Pricing Strategy by Marketers
As marketers know that product prices are not hidden from buyers and most purchase decisions involve price consideration, they will get down to strategizing prices and leave no stone unturned in coming up with the best price for any product. This game of pricing will give another edge to product competitiveness in the market whereby organizations will be able to design a long-term plan for realizing their pricing opportunities.
Disadvantages of Price Transparency
1. Government’s Involvement in Market
Whether a nation’s market is to be free or to be within the clutches of its Government, is the final call of the ruling government of the country. The fate of market functioning ultimately depends on Government’s policies and laws.
Therefore, if Government wants to prohibit transparent pricing and encourage middlemen in every business, buyers will get a false picture of price transparency. Although everything may seem perfect, however, that might not be the real case. In this context, many governments across the nations are trying hard to make laws to give a free hand to the market and encourage fair and transparency in product prices.
2. Unawareness about Health Costs
In most countries especially the US, rising health costs remain a concern even with transparent pricing being in force. As people have been facing problems in knowing the right price for their health products and services, they have no clarity over prices.
This hinders them from knowing the real market value of any pharmaceutical product and they often pay a price, which might not justify the quality of the product. Therefore, removing the necessary barriers and making the health sector as transparent as possible, is the real challenge faced by many nations.
3. Inflationary Threat
Inflation constantly pushes up prices. However, common people might fail to judge a product as they are unaware of the rate of inflation and how it adds up to the final value of any product. They are also unable to access or rely upon any viable data on inflationary costs. In such a case, only market experts have an idea about the inflationary price. This brings in instability within the market and makes it less efficient in realizing its potential.