esragate, page-44

I want to suggest a plausible scenario that would have been well within a CEO's authority that might serve to demonstrate the level of moral and legal ambiguity that can attend to a case such as this.

Imagine that a product, let's call it "Body Sculptor" (BS for short) has a marginal cost of production of $10 per tube and is sold into existing markets at $30 per tube, and that market is absorbing 60% of production capacity.

Let's say that a CEO discovers a new market, isolated from existing markets so that sales of BS into the new market have little or no chance of cannibalizing sales in existing markets, but economic conditions in the new market cannot support the pricing established in existing markets. So, the CEO decides to offer a steep discount for sales into this new market, located in a distant country, called, let us say, "Chikin," selling BS into this market at $20 per tube, as opposed to the normal $30.

Is the company losing $10 on each tube of BS or is the company gaining $10 revenue on each tube of BS that it would not otherwise have earned? the assumption is that these sales would not have otherwise have been made and represent a net increase in revenue to the company. Whether this is a prudent practice depends on your perspective, but differential pricing at the margin is commonplace and is known as total revenue optimization. Airlines are the masters of this practice.

I would imagine that while someone might think such discounts were a bad idea, it's doubtful that anyone would think it a violation of a fiduciary trust. So, let me introduce another factor to consider, hypothetically.

Now let's imagine that some or all of the customers in this distant land of Chiken are related to the CEO in some fashion. Obviously this does not change the financial facts one iota, but would it change the perception?

Just some grist for the speculative mill...