David R. Henderson  

Price Discrimination: Illegal or Not?

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In his excellent post on price discrimination and how pervasive it seems to be, Arnold states:

The manufacturer would like to charge $400 to JS and $200 to BZ. However, to do so blatantly would be illegal.

One commenter challenged his claim that it's illegal and another commenter claimed that price discrimination is illegal under the Robinson-Patman Act. But, unless the interpretation of the law has changed dramatically, the Robinson-Patman makes price discrimination illegal only when the goods are being sold to distributors, not when they're being sold to final users.

Here's what Wikipedia says:

In general, the Act prohibits sales that discriminate in price on the sale of goods to equally-situated distributors when the effect of such sales is to reduce competition.

Why does this matter? It goes to the issue of why retailers choose the methods they do to price discriminate. The main reason is not that price discrimination is illegal--it's not. The main reason is that retailers need a low-cost way of having people self-select. The various methods of price discrimination--charging more for an airline ticket when the person doesn't stay over on a Saturday, for example--work well for that reason.

If you doubt that retailers can legally price discriminate, talk to a new car salesman sometime who has sold, in one day, identical cars to two different people with no trade-in.

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CATEGORIES: Business Economics

COMMENTS (7 to date)
david writes:

A question: would perfect price discrimination reduce the marginal value of income?

This may be of interest if industries that price-discriminate heavily - education, say - dominate larger proportions of family spending.

dWj writes:

Indeed, imperfect price discrimination reduces the marginal value of income. I've been meaning for some time to try to work out a model of this, but never seem to get around to it.

Incidentally, note that it's quite possible a successful business could engage in price discrimination without even realizing it, and is likely that, in some ways, many do. Those whose procedures, purely incidentally, do a better job of price discrimination will (ceteris paribus) outcompete others.

wilco writes:

In hindsight, my hastily written comment was incorrect and I agree that in the case provided it was not illegal price discrimination. However, not necessarily on the grounds offered by the wikipedia article. I don't know about the case law but on its face the act itself wouldn't seem to distinguish based on a final user.

"It shall be unlawful for any person engaged in commerce. . .to discriminate in price between different purchasers of commodities of like grade and quality. . .in commerce, where such commodities are sold for use, consumption, or resale . . .and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce"

Wouldn't use and consumption include final users? Any antitrust attorneys who can shed some light on this? My suspicion is that the present case fails on the anti-competitive element instead.

wilco writes:

I should add: Given the events that prompted the adoption of the act, wikipedia's take seems proper,but the language of the statute doesn't spell it out as such.

Joe Cushing writes:

I think the most common method of price discrimination is to offer different levels of features for a product and charge a very large markup on those features compared to the markup on the base model. I think of cars and pizza.

Joe Cushing writes:

I think competing with my first example of price discrimination has to be the use of time and pricing. This is the practice of introducing a product at a high price and then lowering it over time. This is of course the strategy of electronics producers.

What I like about this method of price discrimination is that more power is given to the consumer to decide how much to pay.

keddaw writes:

Price discrimination should be effectively competed away by having increasingly lower margin middlemen buying the product on behalf of JS above.

Different middlemen would achieve lower margins buysing on JS's behalf at no risk thus the price would tend towards what BZ is paying.

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