Price Discrimination Essay Research Paper Definition of

Price Discrimination Essay, Research Paper

Definition of Price Discrimination

Price discrimination takes place when a seller charges competing buyers different prices for the same commodity or discriminating in the provision of allowances Xcompensation for advertising and other services Xthat may be violating the Robinson-Patman Act. This kind of price discrimination may hurt competition by giving favored customers an edge in the market that has nothing to do with the superior efficiency of those customers.

The Robinson-Patman Act

The Robinson-Patman Act, enacted by Congress in 1936, is concerned with discrimination in the prices charged by sellers to various customers. More business decisions are affected by the Act than any other antitrust law. Virtually every interstate sale and promotion of commodities through wholesale distribution and other channels is subject to its terms.

This law, like other antitrust laws, introduces uncertainty and complexity into the day-to-day operation of business. However, compliance with the antitrust laws is not an option. Therefore, a basic understanding of these laws is necessary for the business person who must comply with its requirements and meet the business challenges presented in today s highly competitive markets. Finally, states have enacted laws, which complement the federal law and in some cases impose additional limits on pricing practices. These laws must also be observed when applicable to business activities.

Provisions of the Law

The Robinson-Patman Act prohibits price discrimination in certain circumstances. The Act requires allegedly discriminatory transactions to satisfy certain jurisdictional prerequisites before its substantive prohibitions apply. In order to bring the substantive portions of the Act into play, there must be:

h Two or more consummated sales in commerce

h Reasonably close in point of time

h Of commodities

h Of like grade and quality

h With a difference in price

h By the same seller

h To two or more different purchasers

h For use, consumption, or resale within the United States, and

h Which may result in competitive injury

Competitive Injury Must be Present

The Act contains a number of separate substantive provision applicable the competitive injury element of an offense. Section 2(a) prohibits a seller from discriminating in price between two or more competing purchasers in the sale of commodities of like grade and quality, where the effect of the discrimination may be substantially to:

h Lessen competition in any line of commerce; or

h Tend to create a monopoly in any line of commerce; or

h Injure, destroy, or prevent competition with any person who grants or knowingly receives the benefit of the discrimination, or with the customers of either of them.

U.S. Supreme Court Case

Texaco Inc. v. Hasbrouck, 496 U.S. 543 (1990)

Argued December 5, 1989

Decided June 14, 1990

Petitioner (Texaco) sold gasoline directly to respondents and several other retailers in Spokane, Washington, at its retail tank wagon prices (RTW) while it granted substantial discounts to two distributors, Gull and Dompier. During the period between 1972 and 1981, the stations supplied by the two distributors increased their sales volume dramatically, while respondents’ sales suffered a corresponding decline. Respondents filed an action against Texaco under the Robinson-Patman Amendment to the Clayton Act (Act), alleging that the distributor discounts violated Section 2(a) of the Act. Respondents recovered treble damages, and the Court of Appeals for the Ninth Circuit affirmed the judgment. After this happened Texaco appealed to the U.S. Supreme Court and the trial was heard.

Texaco tried to argue that legitimate functional discounts do not violate the Act because a seller is not responsible for its customers’ independent resale pricing decisions. While the Supreme Court agreed with the basic thrust of Texaco’s argument, it concluded that in this case it was foreclosed by the facts of record. 3

This was a pretty clear cut price discrimination case. Obviously if Texaco sells the gas at, for example, $5 a gallon to one company and $20 to another the first company is at a great advantage since it could sell the gas at a cheaper price. Which would mean more customers and, thus, more profit. Therefore, Texaco is definitely partially if not fully responsible for its customers independent resale pricing decisions.

Defenses to Price Discrimination

Not all price differences are illegal. The Robinson-Patman Act contains a number of exceptions to the prohibitions embodied in section 2(a).

The Cost Justification Defense

The cost justification defense allows a seller to discriminate in prices where the difference makes only due allowance for differences in cost of manufacture, sale or delivery resulting from the differing methods or quantities in which the buyers are supplied. For example, if one buyer has special need that must be addressed in manufacture, such as an additional part to a gadget, that buyer can be charged for the additional cost. Likewise, adjustments may be made legally for higher or lower selling costs or delivery costs.

The Meet

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