Price Discrimination

Price Discrimination

Introduction

Price discrimination is an issue that faces current business corporations in their quest to cater for a diverse range of customers. Some companies may offer different prices for different customers, a fact that does not resonate well with some customers as well as competing companies. Many companies have found themselves in the hot seat after being sued for price discriminatory practices. However, there is a thin line between ethical and unethical practices and legal and illegal practices. The fact that different prices are charged to different people for the same goods and services may warrant unethical and illegal charges. Nevertheless, organizations may argue that they carry on with price discrimination for the benefit of customers, as offering price discounts on products will enable customers to afford their products. This paper highlights the issues at hand by considering ethical theories, relevant areas of law, and recommendations to reduce liability so as to improve the ethical climate. Price discrimination may be should not be made illegal as the customer is the one who stands to benefit.

Price Discrimination

Types of Discrimination

There are three types of price discrimination, the first one being first degree price discrimination, also known as the perfect price discrimination. It entails charging different prices to different customers for the same quality and quantity of a product. The explanation behind this form of discrimination is that a firm sets the highest price that the customer is willing and able to pay for a product. For this to be achieved, the firm has to know each customer so that the customer can be dealt with on an individual basis. As such, the firm gets the highest return possible from each customer. This type of discrimination is especially witnessed in negotiable business arrangements such as car dealership where the salesman may quote the initial price based on the customer’s appearance and capability to pay. Other customers may be charged a lower price for the same car, and hence price discrimination occurs against more affluent purchasers (Landsburg, 2010).

The second type of price discrimination is known as second degree price discrimination. It involves charging different prices according to the volume of goods sold. Normally, lower prices are charges for larger volumes of goods, with higher prices being charges on smaller packages. Second degree price discrimination is usually seen in quantity discount offers. For instance, a bigger pack of washing detergents costs less than a smaller pack of the same (Landsburg, 2010). While customers may be encouraged to purchase the bigger pack so as to save money, this practice discriminates against people who live alone as they might not require larger bundles of products, and hence end up losing out on the quantity discounts. Students and pensioners are among the groups of people who are negatively impacted by second-degree price discrimination as they may not need huge amounts of products. Large families, more affluent people, and institutions greatly benefit from the discounts as they end up paying less for the same type and quality of products.

Third degree price discrimination involves setting different prices for the same product based on the customer’s specifications. Firms use consumer knowledge to determine different prices for different consumer segments so that everyone can be able to afford the product. They utilize customers’ elasticity of demand to determine prices (Landsburgh, 2010). This type of discrimination is mostly common in the transport sector where particular customers such as students and senior citizens are given discounts so that they pay lower fares than the rest of the people. Movie theaters may also engage in this form of discrimination as they offer subsidized prices on students’ and children’s tickets to watch the same performances as adults. This type of discrimination is deemed unfair to the rest of the public as they are not entitled to the same discounts as the targeted individuals.

Ethical Theories

Ethical theories reflect philosophical views and values that are regarded by the society. The society holds the opinion that producers and manufacturers should have an ethical duty towards their consumers. They have an ethical duty to inform consumers concerning different ranges or products and their prices. They also have an ethical duty to notify customers concerning any discounts or benefits that they are entitled to. The ethical duty of the producer takes on a different perspective when there is a conflict in ethical obligations. On one hand, the manufacturer is supposed to offer uniform prices to consumers purchasing the same products, and is still expected to offer products at a discounted rate so that customers who may not afford them at the normal prices can access them.

Ethics may also be viewed from the competitors’ perspective. Price discrimination may be termed as threatening competition if it is determined that there is a reasonable probability that it can harm competitive processes in the seller’s market. On the other hand, companies have an ethical duty to be fair to their competitors by engaging in ethical practices. For instance, offering extremely low prices on products may drive other similar firms out of the market as they may not be able to match up the prices offered. As a result, many of them would be driven out of the industry and incur huge losses. Several ethical theories have been presented below so as to determine whether price discrimination is an ethical practice or not.

1. Ethical absolutism

Ethical absolutism is an ethical theory that is formed on the belief that there are specific standards through which morality is measured. It states that a wrong is unjustifiable regardless of the circumstances. The concepts of right and wrong do not change based on the particulars of a situation (Bowie, 2004). It can be interpreted to mean that the end does not always justify the means. If an action is deemed as being wrong, but engaging in it would be of benefit to others, this theory states that the action is unethical as the means of achieving the desired goal is questionable.

An example of ethical situation with regards to third degree price discrimination is a case whereby a retailer charges different prices to different customer segments for the same good or service. A movie theater may offer discounts to students so that they can afford tickets to attend shows. They may have good intentions of availing the tickets to individuals who would not have otherwise been able to afford them. They may argue that their actions are ethical as they have resulted in positive outcomes, even though the means used in arriving at those outcomes are unjustifiable. However, the theory of ethical absolutism states that such actions are wrong, and therefore unethical. It can be inferred to mean that price discrimination is unethical as it favors some customers while discriminating others regardless of the reasons for the discrimination.

2. Deontology

Deontology is an ethical theory which asserts that an act’s morality depends on an actor’s motive. In contrast with ethical absolutism, deontology is based on the principle of duty. The producer has a duty to always act with good intent towards the consumer. The principle behind deontology is that the right of the individual, in this case the consumer, should be upheld (Bowie, 2004). In relation to the issue of price discrimination, deontology states that a manufacturer or retailer may practice price discrimination, as long as the rights of consumers in general are respected, and the consumer stands to gain from the price discrimination.

A good illustration of this theory would be second degree price discrimination that entails charging different prices for different quantities of the same product. This type of discrimination offers the consumer a choice between different volumes and their corresponding prices. Normally, the customer who buys the largest bundle of a product  ends up paying less for the same good as compared to the customer who buys smaller quantities. The retailer may argue that the customer is offered an informed choice and thus is not discriminated against. That said, all customers have the potential of benefiting from price discounts as long as they purchase bigger volumes of goods, although consumers who may not afford goods packaged in bigger sizes may be negatively impacted. This theory supports price discrimination as it argues that an organization’s action of providing different prices to different people for the same goods and services is morally right if it does so for the benefit of customers.

Ethical Outlook Leading to the Best Legal Outcome for the Business Situation

Both the ethical absolutism and deontology ethical theory have been analyzed so as to establish their principles. Among the two, deontology would lead to the best legal outcome as it explains that an action is deemed as being ethical as long as the producer acts with the best intention towards the customer. The producer may assert that their main reason for engaging in price discrimination is solely for the benefit of the consumer. The consumer would have much to benefit as they would afford products that they would not have previously afforded due to price constraints. On the other hand, ethical absolutism would be detrimental to the outcome of the business situation as it asserts that the positive outcome of price discrimination does not make up for the process, which is termed as being unethical.

Relevant Areas of Law

There is a close correlation between the law and ethical attitudes upheld by the society. This is because laws and their interpretation originate from the society’s ethical beliefs. Laws are needed so as to regulate the legal environment of business so that unfair practices can be rooted out. Businesses have an obligation not only towards the society, but towards their competitors. With that in mind, laws are created not only to oversee business activities, but also for the protection of the society (Meiners, Ringleb, and Edwards, 2014). Various areas of law are created so as to oversee those activities as outlined below.

 1. Tort Law

A tort refers to a civil wrong recognized by law as grounds for a lawsuit. The wrongs lead to harm, which may constitute the basis for a claim. All torts contain three elements comprising of a conscious act of price discrimination, intent of the act, and damages in form of mental harm. The act by the defendant should be of conscious volition, meaning that the defendant should be awake when the price discrimination occurs. The defendant, in this case the retailer or producer, should be aware of the consequences of engaging in price discrimination. The plaintiff should show proof of suffering damages due to the defendant’s actions (Oswald, 2010).

The intentional infliction of emotional distress tort would be applicable for this issue. This tort requires the fourth element known as actual damages. This means that real damage must have occurred for the intentional affliction of emotional distress tort to be valid (Jennings, 2014). For instance, in case a plaintiff files a case against a manufacturer for intentional affliction of emotional distress occurring as a result of price discrimination, evidence of real damage incurred such as a psychiatrist’s bill should be provided so as to show that the plaintiff was distressed.

  2. Anti-trust law

Section 2 of the Clayton’s Act states that sellers are prohibited from offering different prices to different competitive buyers. Price discrimination is therefore a violation of this Act. Different prices are allowed due to extra costs such as shipping to different geographic regions. Quantity discounts are permitted by this law as long as they are offered uniformly to all customers purchasing the same quantities of goods. Under this law, punishment may entail imprisonment of not more than one year and/or a fine of not more than $5,000.

   3. Criminal law  

The Robinson Patman Act of 1936 criminalizes price discrimination by producers. It was introduced so as to prevent certain forms of price discrimination by sellers. Section 2 (a) of the Act states that it is a violation for a seller to sell similar products to different buyers at different prices within a short period of time, thereby leading to unfair competition.

Discrimination takes place when it is established that there is a difference in net prices between sales to different customers. However, some factors such as difference in delivery times, return policies, or preferential treatment towards certain customers are considered invalid as they do not relate to price. Nevertheless, there are factors that have to be present so as to warrant price discrimination. The first one involves proof of two or more transactions from the same seller that validate a difference in prices. As such, the transactions have to be directly from the seller, and the presence of a third party agent means that the seller cannot be liable for the price discrimination. Third party agents constitute retailers, wholesalers, and manufacturers who may offer different prices from each other. The other factor in section 2(a) specifies that the products have to be of the same quality (Fredman, 2011). This however, does not apply to intangible products such as insurance policies, advertising services, or health services. The content of the product has to be similar, even though packaging may vary. If all those factors are determined, then the plaintiff can file a price discrimination suit.

There are different claims of injury that can be claimed by the plaintiff, depending on whether it was filed by a fellow competitor or by a customer. Prime line injury is filed by a competitor and it involves a reduction in price that is bound to impact negatively on other competitors due to unfair pricing. For it to be effective, three conditions have to be met. First, the plaintiff has to prove that the defendant is selling the product at a lower cost than they were purchased at. Secondly, the competitors have to show that the defendant’s engagement in price discrimination will drive them out of the market. Finally, it has to be established that the price-discriminating company plans to hike up prices once the competitors leave the market (Pollock, 2013).

The other claim of injury is known as the second line injury. It is filed by a customer who is negatively impacted by the price discrimination of a seller. In this case, price difference has to have continued for a long period of time, such as an year. This claim is subject to several factors involving the seller consistently selling the same product to some customers at a lower price and others at a higher price at around the same period of time. The second factor involves the fact that the benefiting customer has gained an undue advantage over other customers (Price Discrimination Handbook, 2013). In relation to this law, price discrimination is therefore illegal and could result in criminal penalties.

Recommendation to Reduce Liability

The importance of reducing liability cannot be overemphasized, and measures that would prevent such an occurrence should be actively undertaken by the seller. Consequences of liability include negative brand image, financial losses, and punitive implications. Measures that a seller would adopt so as to reduce exposure to liability are discussed below.

  1. Notification to all customers regarding discounts

A seller should notify all customers concerning available discounts so that they can make informed choices concerning their purchases. In case of a suit against the seller by a disgruntled customer, the seller may state that section 2(a) of the Robinson Patman Act of 1936 was not violated as all customers were given an equal chance to benefit from the discount (Corrigan, 2011). This would mean that the customer also had a chance of claiming the discount but failed to do so, and as a result has no claim of price discrimination.

  • Notifications concerning Changes in prices

The seller should notify customers about changes in prices and may cite changing market conditions as being the reason for price variances. Section 2(a) of the Robinson Patman Act permits sellers to change prices based on changing conditions such as market conditions, distress sales, and changes in prices of perishable goods (Pollock, 2013). In case prices of goods suddenly hike up due to market conditions, court processes, or increase in production expenses, a seller is allowed to increase prices based on the above conditions.

  • Offering functional discounting

The seller may offer discounts only to wholesalers or agent distributors as this would not necessitate a price discrimination claim. The Supreme Court states that certain benefits may be awarded to distributors and wholesalers as they assist in the distribution channel through advertising and offering storage for the products. However, the exception to this rule is that there has to be no unfair competition between the producer’s direct consumers and the wholesaler’s customers (Zhang, Bruno, & Dutta, 2013). A company may therefore offer discounts with the reason that since the wholesalers and distributors are buying large quantities of goods, this greatly reduces economies of scale, and the said buyers are warranted to get discounts.

  • Equal allowances on promotions

Promotional allowances involving reductions in prices in terms of discounts or payments should be availed to all customers on an equal basis. Since failure to provide a promotional allowance to all customers on an equal basis is a violation of the Robinson Patman Act section 2(d), sellers should provide allowances both to direct and indirect customers (Fredman, 2011). So as to ensure equality, allowances should be based on the purchased quantity.

   Conclusion

Price discrimination should not be made illegal as the customer is the one who greatly benefits. Several ethical theories have been reviewed so as to determine whether the theory can be made into practice. Though the ethical absolutism theory disallows the practice, the deontology theory supports the assertion that price discrimination should be allowed, as long as the one who ends up benefiting is the general public. With that in mind, it can then be concluded that there are ethical theories which support price discrimination, and this has a positive influence on the thesis. Several areas of law consisting of the tort law, Anti-trust law, and criminal law have been analyzed, and they all offer special circumstances under which price discrimination can be termed as illegal. However, the recommendations to prevent exposure to liability have presented ways through which sellers can offer different prices on the same products in a legal manner. The issue of price discrimination may be of benefit to others and may negatively impact some individuals, and the only way to measure its effectiveness is to weigh the benefits versus the demerits. Since the benefits surpass the shortcomings, price discrimination should be embraced as it leads to great monetary savings for the consumer, something that is a welcome relief, during this era of economic constraints.

References

Bowie, R. (2004). Ethical studies (2nd ed.). Cheltenham: Nelson Thornes.

Corrigan, R. H. (2011). Ethics: a university guide. Gloucester, [England: Progressive Frontiers Press.

Fredman, S. (2011). Discrimination law. Oxford [England: Oxford University Press.

Jennings, M. (2014). Business: its legal, ethical, and global environment (6th ed.). Mason, Ohio: Thomson/South Western West.

Landsburg, S. E. (2010). Price theory and applications / Steven E. Landsburg, University of Rochester (Ninth ed.). New York: Cengage Learning.

Meiners, R. E., Ringleb, A. H., & Edwards, F. L. (2014). The legal environment of business (7th ed.). Cincinnati, Ohio: West Legal Studies in Business.

Oswald, L. J. (2010). Law of marketing Lynda J. Oswald.. Cincinnati, Ohio: West/Thomson Learning.

Pollock, J. (2013). Ethical dilemmas and decisions in criminal justice. Cengage Learning

Price discrimination handbook. (2013). Chicago, Ill.: ABA Section of Antitrust Law.

Zhang, Y. W., Bruno, H. A., & Dutta, S. (2013). The Dynamic Effect of Price Discrimination in Business Markets.

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