Most firms are not free to charge whatever prices they want for their products and services. There are restrictions and regulations put in place by the government to protect consumers from unethical pricing practices. Some of the most significant laws include: the Sherman Act, the Clayton Act, and the Robinson-Patman Act. These laws only apply to interstate commerce, though many states have created similar laws to regulate locally-operating firms. The figure above depicts a graphic representation of the most significant public policy issues in pricing. Below are descriptions of these various issues.
Pricing Within Channel Levels
Price-fixing
Price-fixing is the practice of working with a competitor to set agreed-upon prices on products with the intention of controlling the supply and demand in the market. This practice is an infraction of federal law which restricts companies from communicating with competitors prior to setting prices. The practice is also illegal in many international markets, as Proctor and Gamble and Unilever found out when the firms attempted it. They were fined a combined total of $456 million.
Predatory Pricing
The practice of predatory pricing is when a firm sells its products or services at a price that is lower than its costs with the intention of pushing competitors out of the market. This practice is also prohibited federally, but it is very difficult to file formal charges. It is not illegal to sell at prices below costs to move inventory, but it is illegal to sell below costs with the intention of driving competitors out of the market. This is what makes it so difficult to prove when a firm engages in this practice, because one must determine the intent of the firm.
Pricing Across Channel Levels
Price Discrimination
Charging different price terms to customers at a specific level of trade is known as price discrimination. It is federally illegal unless a firm can prove that it is justified by a different level of costs associated with selling to various different retailers. The practice can also be acceptable if a firm is selling the same product at a different level of quality to different retailers. An example of price discrimination would be charging less for a child’s movie ticket than an adult. There is no cost difference associated with the price difference.
Retail Price Maintenance
Laws prohibiting the practice of retail price maintenance prevent firms from requiring dealers to charge a specific price for their products. The firm has every right to suggest a retail price, but no right to require it. For example, in the case of the iPhone K, Apple could not legally require resellers like Best Buy and Walmart to sell the phone at a specific price. This was made apparent when the iPhone 5C was released and Walmart decided to sell it for less than the price suggested by Apple.
Deceptive Pricing
The practice of deceptive pricing involves a seller stating a misleading discount or price that is not, in fact, available to consumers. The most common example of this practice is when firms advertise an extremely high “original” price to make a “sale” price seem more attractive, but it can also be as simple as advertising one price and charging another. Earlier this year, Walgreens was sued for this very practice after charging customers a higher price at the register than was advertised in their stores. This particular form of deceptive pricing is known as scanner fraud.
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