Public Policy and Pricing

Price competition is a core element of our free-market economy. In setting prices, companies usually are not free to charge whatever prices they wish. Many federal, state, and even local laws govern the rules of fair play in pricing. In addition, companies must consider broader societal pricing concerns. In setting their prices, for example, pharmaceutical firms must balance their development costs and profit objectives against the sometimes life-and-death needs of prescription drug consumers (see Real Marketing 11.2)

The most important pieces of legislation affecting pricing are the Sherman Act, the Clayton Act, and the Robinson-Patman Act, initially adopted to curb the formation of ­monopolies and regulate business practices that might unfairly restrain trade. Because these federal statutes can be applied only to interstate commerce, some states have ­adopted similar provisions for companies that operate locally.

A green circle icon. Figure 11.2 shows the major public policy issues in pricing. These include ­potentially damaging pricing practices within a given level of the channel (price-fixing and predatory pricing) and across levels of the channel (retail price maintenance, discriminatory pricing, and deceptive pricing).19

A green circle icon. Figure 11.2

Public Policy Issues in Pricing

Chart explains public policy issues in pricing.

Source: Adapted from Dhruv Grewal and Larry D. Compeau, “Pricing and Public Policy: A Research Agenda and Overview of the ­Special Issue,” Journal of Public Policy and Marketing, Spring 1999, pp. 3–10.

Pricing within Channel Levels

Federal legislation on price-fixing states that sellers must set prices without talking to competitors. Otherwise, price collusion is suspected. Price-fixing is illegal per se—that is, the government does not accept any excuses for price-fixing. Recently, governments at the state and national levels have been aggressively enforcing price-fixing regulations in industries ranging from gasoline, insurance, and concrete to credit cards, computer chips, and e-books. Companies found guilty of price-fixing practices can pay heavy penalties. For example, Apple recently paid $450 million in fines for conspiring with publishers to fix prices on e-books. And four major U.S. airlines—United, Delta, Southwest, and American—now face a potentially costly class action suit and U.S. Department of Justice investigation for conspiring to artificially inflate air fares to “reap huge profits.”20

Sellers are also prohibited from using predatory pricing—selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business. This protects small sellers from larger ones that might sell items below cost temporarily or in a specific locale to drive them out of business. The biggest problem is determining just what constitutes predatory pricing behavior. Selling below cost to unload excess inventory is not considered predatory; selling below cost to drive out competitors is. Thus, a given action may or may not be predatory depending on intent, and intent can be very difficult to determine or prove.

In recent years, several large and powerful companies have been accused of predatory pricing. However, turning an accusation into a lawsuit can be difficult. A blue circle icon. For example, many publishers and booksellers have expressed concerns about Amazon.com’s predatory practices, especially its book pricing:21

A photo shows a Kindle with colorful books on its screen placed over a pile of books.

Photo shows a Kindle with colorful books on its screen placed over a pile of books. Predatory pricing: Some industry critics have accused Amazon.com of pricing books at fire-sale prices that harm competing booksellers. But is it predatory pricing or just plain good competitive marketing?

© Iain Masterton/Alamy Stock Photo

Many booksellers and publishers complain that Amazon’s book pricing policies are destroying their industry. Amazon routinely sells best-selling hardback books as loss leaders at cut-rate prices. And it peddles e-books at fire-sale prices in order to win customers for its Kindle e-reader and tablets. Such very low book prices have caused considerable damage to competing booksellers, many of whom view Amazon’s pricing actions as predatory. According to some industry groups, such practices “harm the interests of America’s readers, impoverish the book industry as a whole, and impede the free flow of ideas in our society.” Still, no predatory pricing charges have ever been filed against Amazon. It would be extremely difficult to prove that such loss-leader pricing is purposefully predatory as opposed to just plain good competitive marketing. “But wait a minute,” states one analyst. “Isn’t that what business is supposed to do—compete to lower prices?”

Pricing across Channel Levels

The Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade. For example, every retailer is entitled to the same price terms from a given manufacturer, whether the retailer is REI or a local bicycle shop. However, price discrimination is allowed if the seller can prove that its costs are different when selling to different retailers—for example, that it costs less per unit to sell a large volume of bicycles to REI than to sell a few bicycles to the local dealer.

The seller can also discriminate in its pricing if the seller manufactures different qualities of the same product for different retailers. The seller has to prove that these differences are proportional. Price differentials may also be used to “match competition” in “good faith,” provided the price discrimination is temporary, localized, and defensive rather than offensive.

Laws also prohibit retail (or resale) price maintenance—a manufacturer cannot require dealers to charge a specified retail price for its product. Although the seller can propose a manufacturer’s suggested retail price to dealers, it cannot refuse to sell to a dealer that takes independent pricing action, nor can it punish the dealer by shipping late or denying advertising allowances. For example, the Florida attorney general’s office investigated Nike for allegedly fixing the retail price of its shoes and clothing. It was concerned that Nike might be withholding items from retailers who were not selling its most expensive shoes at prices the company considered suitable.

Deceptive pricing occurs when a seller states prices or price savings that mislead ­consumers or are not actually available to consumers. This might involve bogus reference or comparison prices, as when a retailer sets artificially high “regular” prices and then ­announces “sale” prices close to its previous everyday prices. For example, luxury apparel and accessories retailer Michael Kors recently settled a class action lawsuit alleging that it used deceptive pricing at its outlet stores. The retailer was charged with tagging products with false “manufacturer’s suggested retail prices” to make its supposed discounted prices more appealing when, in fact, the products were sold only in the outlet stores. Such artificial comparison pricing is widespread in retailing.22

Although comparison pricing claims are legal if they are truthful, the Federal Trade Commission’s “Guides against Deceptive Pricing” warn sellers not to advertise (1) a price reduction unless it is a savings from the usual retail price, (2) “factory” or “wholesale” prices unless such prices are what they are claimed to be, and (3) comparable value prices on imperfect goods.23

Other deceptive pricing issues include scanner fraud and price confusion. The widespread use of scanner-based computer checkouts has led to increasing complaints of retailers overcharging their customers. Most of these overcharges result from poor management, such as a failure to enter current or sale prices into the system. Other cases, however, involve intentional overcharges.

Many federal and state statutes regulate against deceptive pricing practices. For ­example, the Automobile Information Disclosure Act requires automakers to attach a statement on new vehicle windows stating the manufacturer’s suggested retail price, the prices of optional equipment, and the dealer’s transportation charges. However, reputable sellers go beyond what is required by law. Treating customers fairly and making certain that they fully understand prices and pricing terms are an important part of building strong and lasting customer relationships.

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