Question

Based on the information about direct and indirect price discrimination in the Indirect Price Discrimination video, describe your opinion of direct and indirect price discrimination. How do these strategies affect consumers? Do these strategies violate the intent of antitrust laws described in Chapter 13, or do you think they are ethically defensible practices for businesses? Explain your rationale. What factors would have to change to make you change your opinion?

I am not sure why my question was flagged by an expert. The Indirect Price Discrimination video is posted on YouTube. This is not spam, sales, or a trick--that just happens to be where the professor linked us to the video.

Video: https://www.youtube.com/watch?v=FXAja1UdINQ

Answer 1

Definition of direct price discrimination. Pricing strategy that charges different prices relative to costs according to buyer's type for the same good or service. It is designed to elicit higher profit margins from buyers with higher willingness to pay. By using direct price discrimination, the seller can raise profit .

Definition of indirect price discrimination

Pricing strategy that charges different prices relative to costs according to buyer’s choice for similar goods or services. It is designed to elicit higher profit margins from buyers with higher willingness to pay.

By using indirect price discrimination, the seller can raise profit. However, if the discrimination is not precise, the seller might lose some profit as high willingness to pay customers switch to lower end offerings. Indirect price discrimination requires detailed information about each customer segment’s willingness to switch among the products offered.

Example

For instance, airlines and train companies commonly offer multiple fares with different conditions such as unrestricted times of travel at higher prices than journeys with restricted times. For airline travel, examples of conditions include no change to the itinerary, no stopovers and must include a Saturday away.

The objective is for business travelers to choose unrestricted fares and pay more as they normally have less flexibility, for example, they cannot go home until their work is done. On the other hand, leisure travelers choose fares with particular times of travel and pay less, as they are on holiday, there is no need for them to rush back to work at a certain time.

How do companies benefit from price discrimination? or how do they affect consumer

Companies benefit from price discrimination because they can capture 100% of the available consumer surplus, entice consumers to purchase larger quantities of their products or services, or entice otherwise uninterested consumer groups to purchase their products or services. While price discrimination is the act of charging different prices for the same good, there are different price discrimination strategies that can benefit a company.

The first type of price discrimination is first-degree price discrimination, in which a different price is charged for every good. This means that a company can charge the maximum price for each unit, allowing it to capture the available consumer surplus. This type of discrimination is very rare.

The second type of price discrimination is second-degree price discrimination, where different prices are charged based on the quantity of the goods purchased. With this type of discrimination, companies can encourage consumers to purchase large quantities by offering quantity discounts. Costco is a good example of this, because it offers discounts for bulk purchases. Buy-one-get-one retail sales strategies are also an example of second-degree price discrimination, where the price of the average good is reduced when more goods are purchased.

Finally, the third type of price discrimination is third-degree price discrimination, where different prices are charged to different consumer groups for the same good. This type of discrimination helps companies capture consumer purchases from consumer groups that would otherwise be uninterested in their goods. Offering senior discounts at restaurants and movie theatres are typical examples of third-degree price discrimination.

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 seller's attempts to meet a competitor's 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 buyer's 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 market 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 competitor's 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 FTC's 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 savings or meeting a competitor's 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 nonprofit's 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.