Ethical and Legal Dimensions of Pricing

1. Ethical and Legal Dimensions of Pricing Pricing Skills Price Level Price setting Costing for Pricing Financial Analysis Pricing Policy Negotiation Tactics & Pricing Setting Procedures Price Competition Channels Pricing Pricing Strategy Value Communication Communication, Value Selling Tools Life Cycle Pricing Ethical/Legal Price Structure Metrics, Fences, Controls Value Creation Economic Value, Offering Design, Segmentation

2. Discussion Question Many people consider profit maximizing pricing unethical, even when it is perfectly honest and reflects actual value of the product offered. They argue that, while business people are entitled to a "fair" return on investment, it is wrong for them to earn "excessive" profits. Pricing above what is necessary for a fair return, they would argue, is a "consumer rip-off." Do you agree or disagree?

3. Pricing and the Law: A History • The Sherman Act: 1890 • Clayton Act/Federal Trade Commission Act: 1914 • The Robinson-Patman Act: 1936

4. The Law and Pricing • Antitrust laws are federal laws that focus on pricing and other areas of business that would be considered anti-competitive. • In the U.S. enforcement is a triad of agencies: • Department of Justice (DOJ) handles criminal and civil cases • Federal Trade Commission (FTC) handles civil cases only • Private Suits are most common, civil suits with up to treble damage awards • FTC reviews cases but cannot impose punishment; must refer to DOJ to file suit and punishment if found guilty.

5. Clayton Act as amended by Robinson-Patman Act “It shall be unlawful for any person engaged in commerce to discriminate price between purchasers of commodities of like grade and quality . . . Where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce.”

6. Legal Defenses under the Clayton Act • Cost Defense • Meeting Competition Defense

7. Price Fixing and Predatory Pricing • Horizontal Price Fixing: • Collusion, parallelism, or conspiracy among competitors in trade. • Vertical Price Fixing: • Collusion or conspiracy by sellers and buyers to restrict, control, or maintain price. • Predation: • Potentially illegal if used to substantially limit competition.

8. Pricing Agreements and Exchanges of Information • Explicit Agreements: • An agreement to set the same prices or to price according to the same formula, and are per se illegal. • Nonexplicit Agreements • Parallel behavior is legal if it is done exclusively in the self-interest of the firm and avoids any hind of agreement. • Tie-In Sales and Requirements Contracts • Products with tie-ins due to unique technological design are legal. • Exchanges of Information • Not illegal so long as no attempt to limit competition or to agree on prices.

9. Evaluate Each of the Following Statements • Antitrust laws punish companies, not individuals. So long as you can prove that you are following company policy, you are not personally subject to prosecution for pricing decisions. • People who violate the antitrust laws should know better since the laws have been around for over half a century. • Price discrimination is always illegal.

10. Discussion Question • What is the legal status of the following pricing-related decisions that your company might make? Begin each answer by labeling the practice "ILLEGAL" if it is per se illegal; "LEGAL" if it is definitely legal; or "GRAY" if it may or may not be legal depending on the circumstances. • The price of your product varies according to a quantity discount schedule. The schedule is unrelated to costs, reflecting simply the greater price sensitivity of customers who buy in larger quantities. • A mail-order company has begun to sell your prestige luggage at a 30% discount to the consternation of department stores that sell it at list price. You refuse to fill the mail-order company's next order, explaining that you no longer wish to have that company sell your product.

11. Discussion Question • What is the legal status of the following pricing-related decisions that your company might make? Begin each answer by labeling the practice "ILLEGAL" if it is per se illegal; "LEGAL" if it is definitely legal; or "GRAY" if it may or may not be legal depending on the circumstances. • A company that makes frozen dinners is interested in continuing to purchase aluminum trays from you but claims to have received a bid from another company to supply the trays for $9.00 per thousand less. They insist that you meet that price to retain the business. The price that you have been charging this company is the same price that you charge other manufacturers of frozen dinners. Since this buyer is your largest account and you do not want to lose the business, you agree to match the lower bid. • You develop a new letter-quality printer that you intend to sell for only $99, a price that includes very little profit. You plan to profit handsomely, however, from sales of ink cartridges for the printer. You have priced the ink cartridges at $29 each although they cost you only $1.50 to make.

12. Discussion Question • What is the legal status of the following pricing-related decisions that your company might make? Begin each answer by labeling the practice "ILLEGAL" if it is per se illegal; "LEGAL" if it is definitely legal; or "GRAY" if it may or may not be legal depending on the circumstances. • At a recent trade association meeting, the president of AFAX, your company's largest competitor, makes a speech denouncing ruinous price cutting in the industry. He argues that all companies would be better off if they all refused to discount below their list prices. As an indication of good faith, he announces that his company will stick to charging only list prices for the next month in the hope that others will see the advisability of doing the same. Your company is one that often used price in the past to capture more market share. At current prices, however, your company is suffering losses along with the industry. At a meeting of top management, you decide that it would be in your interest to follow your competitor and refuse to discount your list prices for the next month. The minutes of the meeting have been well documented.

13. Discussion Question • What is the legal status of the following pricing-related decisions that your company might make? Begin each answer by labeling the practice "ILLEGAL" if it is per se illegal; "LEGAL" if it is definitely legal; or "GRAY" if it may or may not be legal depending on the circumstances. • The circumstances facing your company are described in the previous slide but with one additional piece of information. After the speech, the presidents of a number of other companies, including your own, crowd around the president of AFAX to congratulate him. Representatives of a few companies are noticeably absent. The AFAX president notes this and comments that "a few bad apples can spoil the pie." Someone else comments that it is everyone's job to identify the "bad apples" and keep them in line. He suggests that the trade association establish a price monitoring system to identify quickly who is cutting prices to what customers and by how much. Any company that does not report the prices it charges in a timely and accurate fashion should be excluded from membership in the association. The next day, the motion passes. The representative of your company votes for the motion.