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Chapter 16: Problem 10

A columnist on forbes.com offered the following advice to retailers practicing price discrimination: "Consumers don't much like the idea of other people getting better deals than are offered to them, and retailers need to be careful not to turn differentiated pricing into discriminatory pricing. There has to be a legal and ethical rationale for offering different prices to different customers." What would be a legally acceptable reason for offering different prices to different customers? What would be a legally unacceptable reason? Are there situations in which price discrimination might be legally acceptable but ethically unacceptable? Briefly explain.

Short Answer

Expert verified
Legally acceptable reasons for price discrimination might include differences in cost structure, offering discounts to certain groups or dynamic pricing models. Unacceptable reasons would be pricing differences based on protected characteristics like race or religion. A practice that may be legal but ethically unacceptable could be charging higher prices in poorer neighborhoods.

Step by step solution

01

Define Price Discrimination

Price discrimination is when a company sells the same product or service at different prices to different customers. This can be based on a variety of factors such as market segment, geographical location, or buyer’s ability to pay.
02

Legally Acceptable Price Discrimination

Prices can legitimately vary based on differences in cost structure. For example, a business might charge more for the same product in a location where it faces higher operating expenses. Offering discounts to certain groups like students, seniors, or military personnel is typically seen as acceptable, too. Another legally acceptable reason could be fluctuating prices due to dynamic pricing models, where prices can vary based on demand and supply.
03

Legally Unacceptable Price Discrimination

Prices should not differ based on characteristics protected by law such as race, religion, gender, or nationality. Discrimination in this sense would be both illegal and unethical.
04

Legal but Ethically Questionable Price Discrimination

An example of price discrimination that could be legal but ethically unacceptable is charging more for goods or services in poorer neighborhoods because residents have less choice about where to shop. Though this practice might not be explicitly illegal, it raises significant ethical questions.

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Most popular questions from this chapter

Would you expect a publishing company to use a strict cost-plus pricing system for all its books? How might you find some indication about whether a publishing company actually is using cost-plus pricing for all its books?

What is the law of one price? What is arbitrage?

The Danish firm a2i Systems A/S sells software that helps service stations implement dynamic pricing strategies for gasoline sales. Service stations that use the software typically offer lower prices in the morning than in the afternoon and even raise prices when competing stations with very low prices have long lines. In an article in the Wall Street Journal, the firm's CEO noted, "This is not a matter of stealing more money from your customer. It's about making margin on people who don't care, and giving away margin to people who do care." a. What does the CEO mean by "margin"? b. Briefly explain how these pricing strategies "make margin" on customers who don't care and "give away margin" on customers who do care.

(Related to Solved Problem 16.1 on page 541) In 2016 , Walmart closed 150 stores in the United States and deeply discounted the merchandise in them. Some people bought the merchandise at these low prices and resold it on Amazon, eBay, and other sites. An article in the Wall Street Journal described one reseller who "sent three employees in a 26 -foot truck to the nearest closing Walmart, about 160 miles south. ... They hauled off \(\$ 35,000\) in merchandise, like Legos and Star Wars pajamas, which he said he expects to sell for as much as \(\$ 100,000\) on Amazon." a. Is the reseller making a \(\$ 65,000\) profit on these goods? Briefly explain. b. Is the reseller exploiting the people who buy these goods from him on Amazon? Briefly explain.

Jason Furman and Tim Simcoe, who were at the time chair of and a senior economist for President Barack Obama's Council of Economic Advisors, wrote, "Economists have studied [price discrimination] for many years, and while big data seems poised to revolutionize pricing practice, it has not altered the underlying principles.... Those principles suggest that [price discrimination] is often good for both firms and their customers." Furman and Simcoe described "needbased financial aid for college students" as an example of price discrimination that is good for consumers. a. What do Furman and Simcoe mean by "underlying principles"? b. In what sense is need-based financial aid an example of price discrimination? Is financial aid good for both colleges and students? Briefly explain.
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