Price Dis­crim­i­na­tion

Fiji Sun - - Business - Bobby Ma­haraj Bobby Ma­haraj is the chief ex­ec­u­tive of the Fiji Com­merce Com­mis­sion. This is a reg­u­lar col­umn from the Com­mis­sion in the Fiji Sun.

This week’s ar­ti­cle fo­cuses on price dis­crim­i­na­tion. It higlights the im­por­tance of the main eco­nomic mo­tives for price dis­crim­i­na­tion un­der the Fiji Com­merce Com­mi­sion De­cree(2010) and re­stric­tive trade prac­tice.

What Is Price Dis­crim­i­na­tion?

Price dis­crim­i­na­tion ex­ists when two “sim­i­lar” prod­ucts which have the same cost are sold by a trader at dif­fer­ent prices. That is charg­ing dif­fer­ent prices to dif­fer­ent cus­tomers for the same prod­uct and with the same cost. This ar­ti­cle aims to ex­plain some of the main eco­nomic mo­tives for price dis­crim­i­na­tion, and to out­line when this prac­tice will have an ad­verse or ben­e­fi­cial ef­fect on con­sumers, busi­ness and on to­tal wel­fare.

Price Dis­crim­i­na­tion un­der CCD2010

Sec­tion 71 of CCD2010 re­stricts a trader from en­gag­ing in any con­duct re­lat­ing to sup­ply of iden­ti­cal goods or ser­vices to dif­fer­ent play­ers that has an ef­fect of less­en­ing com­pe­ti­tion via dis­crim­i­na­tory prac­tices in terms of: • The prices charged for the goods; • Any dis­counts, al­lowances, re­bates or cred­its given or al­lowed in re­la­tion to the sup­ply of the goods;

• The pro­vi­sion of ser­vices in re­spect of the goods; or • The mak­ing of pay­ments for ser­vices pro­vided in re­spect of the goods.

For in­stance, price dis­crim­i­na­tion can be ob­served in the fol­low­ing case. As­sume Com­pany A sup­plies bot­tled wa­ter in whole­sale quan­ti­ties to var­i­ous re­tail­ers in a mar­ket. The ex-fac­tory cost of a 1.5 litre bot­tled wa­ter is $1.00 and the nor­mal whole­sale price is $1.50 per 1.5L bot­tle. Re­tail­ers A and B are com­peti­tors lo­cated in the same ge­o­graph­i­cal mar­ket. Com­pany A and Re­tailer A en­ter into an un­der­stand­ing to trade a 1.5 litre bot­tled wa­ter at $1.10 whereas the nor­mal price of $1.50 is ap­plied to Re­tailer B.

In this in­stance Re­tailer B will be at a com­pet­i­tive dis­ad­van­tage com­pared to re­tailer A in terms of the re­tail prices. Given the huge dis­count per bot­tle of­fered to Re­tailer A, the com­pe­ti­tion for bot­tled wa­ter in this ge­o­graph­i­cal mar­ket will be less­ened due to dis­crim­i­na­tory whole­sale prices. A con­duct may not be con­sid­ered price dis­crim­i­na­tory if the price vari­ances can be ex­plained by dif­fer­ences in the cost of serv­ing dif­fer­ent con­sumers such as cost of man­u­fac­ture, dis­tri­bu­tion, sale or de­liv­ery re­sult­ing from the dif­fer­ing places to which, meth­ods by which or quan­ti­fies in which the goods are sup­plied to the pur­chasers. For ex­am­ple, con­sumers who pay higher in­sur­ance pre­mi­ums or higher in­sur­ance rates may be more risky and thus more costly to sup­ply than con­sumers who pay lower rates. Se­condly it is not an act of price dis­crim­i­na­tion if the dis­crim­i­na­tion is con­sti­tuted by an act in good faith to meet a price or ben­e­fit of­fered by a com­peti­tor of the sup­plier. The onus of prov­ing that a trader busi­ness has not en­gaged in con­duct of price dis­crim­i­na­tion is on the busi­ness sus­pected to have en­gaged in the said con­duct un­der CCD2010.

There are three main rea­sons why com­pe­ti­tion pol­icy may be con­cerned with price dis­crim­i­na­tion.

• Firstly, a dom­i­nant firm may “ex­ploit” fi­nal con­sumers by means of price dis­crim­i­na­tion, with the re­sult that to­tal and/or con­sumer wel­fare are re­duced.

• Se­condly, it is some­times a pol­icy ob­jec­tive to at­tain a “sin­gle mar­ket” across the re­gion. Ar­guably, one man­i­fes­ta­tion of a sin­gle mar­ket is that a firm does not set dif­fer­ent prices in dif­fer­ent re­gions, or at least it does not pre­vent ar­bi­trageurs re­selling goods sourced in the low-price re­gion to the high-price re­gion. That is to say, firms are of­ten pre­vented from seg­ment­ing mar­kets with a view to en­gag­ing in price dis­crim­i­na­tion.

• Lastly, per­haps most im­por­tantly from a com­pe­ti­tion author­ity’s point of view, the author­ity may be con­cerned that price dis­crim­i­na­tion can be used by a dom­i­nant firm to “ex­clude” (or weaken) ac­tual or po­ten­tial ri­vals.

Lev­els of Price Dis­crim­i­na­tion

In most mar­kets, busi­nesses set the charges for pur­chase of their prod­ucts by means of a sim­ple price per unit for each prod­uct, where th­ese prices do not de­pend on who makes the pur­chase. Such prices : (i) are anony­mous (they do not de­pend on the iden­tity of the con­sumer)

(ii) do not in­volve quan­tity dis­counts for a spe­cific prod­uct, and

(iii) do not in­volve dis­counts for buy­ing a range of prod­ucts. The fol­low­ing are three gen­eral lev­els of price dis­crim­i­na­tion.

First-de­greep­rice dis­crim­i­na­tion or per­fect price dis­crim­i­na­tion,

means that the seller sells each unit of the good at the max­i­mum price that any­one is will­ing to pay for that unit of the good. Al­ter­na­tively, per­fect price dis­crim­i­na­tion is some­times de­fined as oc­cur­ring when the seller makes a sin­gle take-it-or-leave-it of­fer to each con­sumer that ex­tracts the max­i­mum amount pos­si­ble from the mar­ket. For ex­am­ple: This can best be seen in car deal­ers, where the price on the car is ne­go­tiable, and the deal­ers job is to get the most out of the con­sumer as pos­si­ble.

Sec­ond-de­gree price dis­crim­i­na­tionor non lin­ear price dis­crim­i­na­tion

, oc­curs when in­di­vid­u­als face non-lin­ear price sched­ules, i.e. the price paid de­pends on the quan­tity bought. The stan­dard ex­am­ple of this form of price dis­crim­i­na­tion is quan­tity dis­counts.

Third-de­gree price dis­crim­i­na­tion

based around the idea that the firm sets prices that will ac­com­mo­date the con­sumer. The firms know broad de­mo­graph­ics about the par­tic­u­lar types of con­sumers they will sup­ply, and charge prices such that every­one will be able to con­sume the prod­uct.

Forms of Price Dis­crim­i­na­tion Non-anony­mous­price dis­crim­i­na­tions

This oc­curs when a firm of­fers a dif­fer­ent tar­iff to iden­ti­fi­ably dif­fer­ent con­sumers or con­sumer groups. Ex­am­ples of this prac­tice in­clude sell­ing the same drug at dif­fer­ence prices for hu­man and an­i­mal use. Un­less ar­bi­trage be­tween con­sumer groups is very easy or com­pe­ti­tion be­tween firms is al­most per­fect, we ex­pect that any firm, if per­mit­ted to do so, would wish to set dif­fer­ent tar­iffs to dif­fer­ent groups.

Quan­tity dis­counts

This oc­curs when the per-unit price for a spe­cific prod­uct de­creases as the num­ber of pur­chased units in­creases. This role for non­lin­ear pric­ing ex­ists even if all con­sumers are sim­i­lar. Th­ese in­cludes re­bates, dis­count coupons, bulk and quan­tity pric­ing, sea­sonal dis­counts, and fre­quent buyer dis­counts which ef­fec­tively re­duces the cost per unit.

ˆBundling dis­counts

This oc­curs when the price for one prod­uct is re­duced if the con­sumer also buys an­other prod­uct. Two vari­ants of bundling ex­ist:

Pure bundling

Is where a con­sumer can only pur­chase the prod­ucts as bun­dle and there is no scope for buy­ing an in­di­vid­ual item. It forces some con­sumers to pur­chase prod­ucts for which their will­ing­ness-to-pay is smaller than the cost of sup­ply. In ad­di­tion, we will see that pure bundling can pro­vide a means by which to de­ter en­try by sin­gle-prod­uct firms.

Mixed bundling

Is where the firm sets prices for a bun­dle and also for in­di­vid­ual items. Mixed bundling (with two prod­ucts) sorts con­sumers en­doge­nously into three groups: those with a strong taste for both prod­ucts (who buy the bun­dle from the firm), those with a strong pref­er­ence for prod­uct 1 but weak pref­er­ences for prod­uct 2 (who buy just prod­uct 1), and those with the re­verse tastes (who buy just prod­uct 2).

Nega­tive Ef­fects of Price Dis­crim­i­na­tion on Con­sumers and Busi­ness

The ef­fects of price dis­crim­i­na­tion are mul­ti­ple, com­plex and highly de­pen­dent on the com­pet­i­tive en­vi­ron­ment in which firms op­er­ate.

• Price dis­crim­i­na­tion ben­e­fits busi­nesses through higher prof­its. A dis­crim­i­nat­ing mo­nop­oly is ex­tract­ing con­sumer sur­plus and turn­ing it into su­per­nor­mal profit.

• Price dis­crim­i­na­tion can also be used as a preda­tory pric­ing tac­tic to harm com­pe­ti­tion and in­crease a firm’s mar­ket power. This can be ben­e­fi­cial to the pro­duc­ers em­ploy­ing price dis­crim­i­na­tion; how­ever, other pro­duc­ers may be forced out of the mar­ket, un­der­cut by the low prices of­fered by the firm prac­tic­ing price dis­crim­i­na­tion. This can re­sult in in­ef­fi­ciency in the long term as pro­duc­ers gain mo­nop­oly power and be­come in­ef­fi­cient due to the lack of com­pe­ti­tion. • Lessens com­pe­ti­tion and con­sumer choice. Next Week: Anti-Com­pet­i­tive Con­duct

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