Legality of Price Discrimination

by Tim Smith, PhD, 23 June 2004

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Are pricing mechanisms that charge different prices to different customers in business markets legal? More than any other issue, concerns of the legality of price discrimination are raised when discussing pricing mechanisms. Due to the well publicized legal cases against executive greed, predatory pricing, and outright fraud; managers and have righteously steered clear of any potential lawsuit stemming from their pricing mechanisms. Yet the law does not preclude all forms of price discrimination. In fact, price discrimination is legal in a growing number of markets as the service sector continues to outpace the product sector.

Robinson-Patman Act
The Robinson-Patman Act of 1936, an amendment to section 2 of the Clayton Act, specifies the conditions under which price discrimination is illegal. This act is concerned with business markets. In order for substantive portions of the Robinson-Patman Act to be invoked, there must be:

• two or more sales must have been consummated
• in a reasonably close time period
• of commodities of like grade and quality
• with a different price
• by the same seller
• to two or more different purchasers
• for use, consumption, or resale within the United States
• which may result in competitive injury.

Not a Blanket Prohibition
The Robinson-Patman Act is not a blanket prohibition of price differential. Outside of its conditions, pricing mechanisms can yield wildly different prices for different customers. Examining key clauses within these conditions uncovers areas where different prices for different customers are legal.

First, the Robinson-Patman Act covers commodities, in other words tangible items. Value transactions that substantially involve services or licenses to intellectual property such as software are not subject to the terms of the Robinson-Patman Act. As the US economy increasingly becomes a service economy rather than a manufacturing economy, the jurisdiction of the Robinson-Patman Act over transactions decreases.

Second, the Robinson-Patman Act requires that the differential pricing must be able to result in competitive injury. The “competitive injury” referred to is one that injures your customer’s ability to compete, not your competitor’s competitiveness. Evidence that breaks the causal connection between differential pricing and competitive injury will overcome the condition of competitive injury. If the same product is being sold to two different customers that are not in the same industry, or are at different levels in the distribution chain, or are in different geographies, courts will often conclude that competitive injury has not been caused.

Third, outside of these general clauses, the Robinson-Patman Act allows for a number of exceptions. The most commonly invoked exception is one that allows prices to vary in order to meet competition. The “meeting competition” exception allows for prices to vary in competitive bidding situations. A second permissible defense includes varying prices for “cost justification” reasons such as delivery schedules or distribution chain position. “Changed conditions”, the third permissible defense, allows for prices to vary due to changing marketability of perishable goods and seasonal items and also distress sales.

Use Prudence
Pricing decisions should be considered in a like manner as other strategic business decisions. Executives must first understand the potential, second determine a means to exploit the potential, third implement the plan to achieve, and fourth review the results. This review of the Robinson-Patman Act focuses on understanding the potential to charge different prices to different customers. From this review, it is clear that there are conditions where price differences between customers are legal. Moreover, there are other conditions outside of those outlined where differential pricing is allowed. Thus, the potential to implement differential pricing may exist for your business. Prudence suggests legal council prior to implementation.

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References
Keeley, Kuenn, & Reid, “What Every Business Should Know about Price Discrimination”, 2004
http://www.kkrlaw.com/articles/kkr_price_discrimination_2004.pdf

Business Law Inc. “Executive Legal Summary No. 18 The Robinson-Patman Act”
http://www.businesslaws.com/els18.htm

Donald S. Clark, Secretary Federal Trade Commission, “The Robinson-Patman Act:
General Principles, Commission Proceedings, and Selected Issues”, speech before The Ambit Group Retail Channel Conference for the Computer Industry, San Jose, California June 7, 1995.
http://www.ftc.gov/speeches/other/patman.htm

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Author
Tim Smith, PhD is Editor of The Wiglaf Journal, Principal of Wiglaf LLC, and Adjunct Professor at DePaul Graduate School of Business.

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