Price Discrimination Essay Example for Free

Price Discrimination Essay A seller charging competing buyers different prices for the same commodity or discriminating in the provision of allowances — compensation for advertising and other services — may be violating the Robinson-Patman Act. This kind of price discrimination may give favored customers an edge in the market that has nothing to do with their superior efficiency. Price discriminations are generally lawful, particularly if they reflect the different costs of dealing with different buyers or are the result of a sellers attempts to meet a competitors offering. The Supreme Court has ruled that price discrimination claims under the Robinson-Patman Act should be evaluated consistent with broader antitrust policies. In practice, Robinson-Patman claims must meet several specific legal tests: 1.The Act applies to commodities, but not to services, and to purchases, but not to leases. 2.The goods must be of like grade and quality. 3.There must be likely injury to competition (that is, a private plaintiff must also show actual harm to his or her business). 4.Normally, the sales must be in interstate commerce (that is, the sale must be across a state line). Competitive injury may occur in one of two ways. Primary line injury occurs when one manufacturer reduces its prices in a specific geographic market and causes injury to its competitors in the same market. For example, it may be illegal for a manufacturer to sell below cost in a local market over a sustained period. Businesses may also be concerned about secondary line violations, which occur when favored customers of a supplier are given a price advantage over competing customers. Here, the injury is at the buyers level. The necessary harm to competition at the buyer level can be inferred from the existence of significant price discrimination over time. Courts may be starting to limit this inference to situations in which either the buyer or the seller has m arket power, on the theory that, for example, lasting competitive harm is unlikely if alternative sources of supply are available. There are two legal defenses to these types of alleged Robinson-Patman violations: (1) the price difference is justified by different costs in manufacture, sale, or delivery (e.g., volume discounts), or (2) the price concession was given in good faith to meet a competitors price. The Robinson-Patman Act also forbids certain discriminatory allowances or services furnished or paid to customers. In  general, it requires that a seller treat all competing customers in a proportionately equal manner. Services or facilities covered include payment for or furnishing advertising or promotional allowances, handbills, catalogues, signs, demonstrations, display and storage cabinets, special packaging, warehousing facilities, credit returns, and prizes or free merchandise for promotional contests. The cost justification does not apply if the discrimination is in allowances or services furnished. The seller must inform all of its competing customers if any services or allowances are available. The seller must allow all types of competing customers to receive the services and allowances involved in a particular plan or provide some other reasonable means of participation for those who cannot use the basic plan. A more detailed discussion of these promotional issues can be found in the FTCs Fred Meyer Guides. Under certain circumstances, a buyer who benefits from the discrimination may also be found to have violated the Act, along with the seller who grants the discrimination, if the buyer forced, or induced, the seller to grant a discriminatory price. Although proof of a violation of the Robinson-Patman Act often involves complex legal questions, businesses should keep in mind some of the basic practices that may be illegal under the Act. These include: †¢below-cost sales by a firm that charges higher prices in different localities, and that has a plan of recoupment; †¢price differences in the sale of identical goods that cannot be justified on the basis of cost s avings or meeting a competitors prices; or †¢promotional allowances or services that are not practically available to all customers on proportionately equal terms. Under the Nonprofit Institutions Act, eligible nonprofit entities may purchase — and vendors may sell to them — supplies at reduced prices for the nonprofits own use, without violating the Robinson-Patman Act. The Health Care Services Products Division issued a recent advisory opinion discussing the application of this exemption to pharmaceutical purchases by a nonprofit health maintenance organization. Q: I operate two stores that sell compact discs. My business is being ruined by giant discount chains that sell their products for less than my wholesale cost. What can I do? A: Discount chains may be able to buy compact discs at a lower wholesale price because it costs the manufacturer less, on a per-unit basis, to deal with large-volume customers. If so, the manufacturer may have a cost justification defense  to the differential pricing and the policy would not violate the Robinson-Patman Act. Q: One of my suppliers is selling parts at its company-owned store at retail prices that are below the wholesale price that it charges me for the parts. Isnt this illegal? A: The transfer of parts from a parent to its subsidiary generally is not considered a sale under the Robinson-Patman Act. Thus, this situation would not have the required element of sales to two or more purchasers at different prices. †¢Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. Definition of Price Discrimination A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price. Investopedia explains Price Discrimination Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers. While perfect price discrimination is illegal, when the optimal price is set for every customer, imperfect price discrimination exists. For example, movie theaters usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age bracket, with the highest charge going to the adult population. Price Discrimination When you were young, did you ever order from the childrens menu in a restaurant? When a family with small children goes to a restaurant, they are often given a childrens menu in addition to the regular menu. If they order two similar items, one from each menu, they will find that the item ordered from the childrens menu will be a bit smaller, but its price will be much smaller. In fact, it would often be worthwhile for the entire family to order from the childrens menu, but they cannot. Restaurants usually only allow children to order from it.1 Why do restaurants use childrens menus?  Economists doubt that restaurant owners have a special love for children; they suspect that the owners find offering childrens menus to be profitable. It can be profitable if adults who come to restaurants with children are, on the average, more sensitive to prices on menus than adults who come to restaurants without children. Children often do not appreciate restaurant food and service, and often waste a large part of their food. Parents know this and do not want to pay a lot for their childs meal. If restaurants treat children like adults, the restaurants may lose customers as families switch to fast-food restaurants. If this explanation is correct, then restaurants price discriminate.2 A seller price discriminates when it charges different prices to different buyers. The ideal form of price discrimination, from the sellers point of view, is to charge each buyer the maximum that the buyer is willing to pay. If the seller in our monopoly example could do this, it could charge the first buyer $7.01, the second buyer $6.51, etc. In this case the marginal revenue curve becomes identical with the demand curve. The seller will sell the economically efficient amount, it would capture the entire consumers surplus, and it would substantially increase profits. The Simple Analytics of Monopoly-Repeated OutputMarginal CostMarginal Benefit Every seller would price discriminate if there were not two major obstacles standing in the way. First, the seller must be able to distinguish between those buyers who are willing to pay a high price from those who are not. Second, there must be substantial difficulty for a low-price buyer to resell to those willing to buy at a high price.3 Because price discrimination is potentially profitable, businesses have found many ways to do it. Theaters often charge younger customers less than adults. Doctors sometimes charge  the rich or insured patient more for services than they charge the poor or uninsured. Grocery stores have a lower price for people who bother to check the newspaper and clip coupons. Some companies, such as firms selling alcoholic beverages, produce similar products but try to promote one as a prestige brand with a much higher price. Electric utilities usually charge lower rates to people who use a lot of electricity (and thus probably have electric stoves and water heaters) than they do to those who use only a little electricity (and who probably have gas stoves and water heaters). Banks offer special interest rates on Certificates of Deposit (CDs) that will not be obtained when one lets a CD roll over. People who are more sensitive to interest rates will take the time and effort to personally renew each maturing CD. To the extent that businesses find ways to price discriminate, they eliminate the triangle of welfare loss and approach the economically efficient amount of production. Thus, the mere existence of monopoly does not prove there is economic inefficiency.