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The Jewish Ethicist: Costly Competition

The Jewish Ethicist: Costly Competition

Can I use my cost advantage to drive a competitor out of business?

by

Q. We found a way to attain an overwhelming cost advantage over our competitors. Is it ethical for us to lower prices so much that they are left with almost no business?

A: The issue of fair business competition is an ancient one, which is extensively discussed in the Jewish sources.

The most prominent insight we observe is that "fair" competition does not only mean that the rules are fair, but means above all that the rules apply equitably to all players. The Mishna states: "Rebbe Yehuda says, a storekeeper should not distribute treats to children, since this accustoms them to buy from him; but the Sages permit it. And [Rebbe Yehuda says] that he shouldn't undercut the going price; but the Sages said this is praiseworthy."

The Talmud explains why the authoritative majority opinion -- that of the Sages -- finds no fault with such inducements: "He can say, I give out nuts, you can give out prunes." (1)

In other words, attracting customers by providing an advantage in merchandise or price is permissible and even praiseworthy, provided the merchant is not exploiting any unfair advantage unavailable to competitors.

In your case, all producers are constantly seeking ways to cut costs, and so you can say to your competitors, "I saved money on raw materials; you go ahead and save money on payroll." The fundamental ability to compete is common to all sellers in your market.

Yet many authorities added a caveat to this principle: it is appropriate to draw customers, but not to the extent of depriving a competitor of his livelihood entirely. (2) The Jewish sages throughout the generations were passionately concerned to maintain each individual's ability to support himself at some minimal level.

This approach isn't in complete harmony with some modern ideologies. Free-market advocates inform us that the growth and development of the market necessarily involves business failures, and that ultimately the entire system works more efficiently when there is no interference in this process. And there is much truth in this insight, and much to be gained from the action of the "invisible hand" of competition.

But practically speaking, there are some individual instances where the hardship of a business failure really outweighs the economic benefits to the market. Consider this: Almost any economics professor will tell you that keeping an inefficient business in operation by limiting competition amounts to no more than a tax on consumers. Perhaps the gross income of this inept firm is a million dollars a year; ten percent of this is just a de facto subsidy paid by customers in the form of inflated prices for the firm's product. Result: $100,000 of consumer money wasted. This is undoubtedly correct, and as an economics professor myself I teach the same thing.

But sometimes we need to ask ourselves what the alternative is. Perhaps right now there are no employment opportunities in the region of the failing plant. If the company goes out of business the burden on the dole will be five hundred thousand dollars a year! Result:

  • $500,000 wasted, instead of one hundred thousand.
  • A tax imposed on all citizens, instead of one that applies only to those who voluntary choose to buy this firm's product.
  • Scores of frustrated and idle unemployed who feel they are not contributing to society, instead of scores of busy workers who are proud of their work, even if they are aware that there are other, competing firms which may do a better job.
Now the fact remains that in today's business environment, drawing the line at driving a competitor out of business is not in the "rules of the game", and in most cases people can find an alternative livelihood. So in all probability is it not unethical for you to fully exploit your cost advantage, thus providing a substantial benefit to your workers and to the consumers in your market.

But before you adopt this approach, take a minute to look at the bigger picture. If you can make a similar return with more gentlemanly competition, which does not deprive your competitor of his livelihood, this is a praiseworthy and ethical course of action -- one you should carefully examine and consider.

SOURCES: (1) Babylonian Talmud Bava Metzia 60a. (2) Bava Batra 21b.

Published: November 22, 2003


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Visitor Comments: 1

(1) Natalie Kehr, October 13, 2007 11:02 PM

Exploiting a monopoly

Lower prices may benefit customers in the short term, but there is a danger that a monopoly supplier will raise prices to just below the level which would make it economic for a competitor to fund setting up in competition.

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