united-kingdom business
UK - Is there a legal limit to the profit margin of an item or service?
<p>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. </p>

<p>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.</p>

<p>I'm interested in the UK mainly but other countries are acceptable.</p>

<h2>Unless there is a law preventing you, you can charge whatever you like for your goods and services.</h2>

<p><strong>There are <em>lots</em> of laws that prevent you.</strong></p>

<p>Just a short list, you cannot:</p>

<ul>
<li>Charge more than the regulated price if you are in a price regulated industry (e.g. <a href="https://www.ofcom.org.uk/about-ofcom/latest/media/analysts/regulated-prices" rel="nofollow noreferrer">telecommunications</a>)</li>
<li><a href="http://www.economicsonline.co.uk/Business_economics/Regulation.html" rel="nofollow noreferrer">Collude</a> to fix prices</li>
<li>Form a <a href="http://www.economicsonline.co.uk/Business_economics/Regulation.html" rel="nofollow noreferrer">cartel</a></li>
<li>Abuse your <a href="http://www.economicsonline.co.uk/Business_economics/Regulation.html" rel="nofollow noreferrer">market power</a>: this prohibits practices such as predatory pricing, bundling, etc.</li>
<li>Sell at a higher price than <a href="https://www.gov.uk/marketing-advertising-law/regulations-that-affect-advertising" rel="nofollow noreferrer">advertised</a></li>
<li>Profiteer to benefit from unexpected shifts in demand</li>
</ul>

<p>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.</p>

<p>It is somewhat true. There are limits on prices of pharmaceuticals (Health Service Medical Supplies (Costs) Act 2017). There is also <a href="https://en.wikipedia.org/wiki/Article_102_of_the_Treaty_on_the_Functioning_of_the_European_Union" rel="nofollow noreferrer">Article 102 of the Treaty on the Functioning of the European Union</a>:</p>

<blockquote>
  <p>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.</p>
  
  <p>Such abuse may, in particular, consist in:</p>
  
  <p>(a) directly or indirectly imposing unfair purchase or selling prices
  or other unfair trading conditions...</p>
</blockquote>

<p>Prices (high or low) fall within the ambit of unfair trading conditions. See the case of <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:61976CJ0027&amp;from=EN" rel="nofollow noreferrer">United Brands</a>:</p>

<blockquote>
  <p>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.</p>
</blockquote>

<p>As spelled out in <a href="https://www.uea.ac.uk/documents/107435/107587/1.150484!ccp10-04.pdf" rel="nofollow noreferrer">this article</a>, 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.</p>
