Clayton Act - Price Discrimination - Explained
When Charging Different Prices to Different Buyers is Illegal
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What is Price Discrimination?
Price discrimination under the Clayton Act means charging a different price for a commodity based upon something other than quality, quantity, or cost of selling. The Robinson-Patman Act, an amendment to the Clayton Act 2, addressed the issue of a seller charging purchasers of commodities different prices. This practice can be anticompetitive when the price is below costs and gives one customer a competitive edge in the market that is not related to operational superiority.
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What is Required for a Price Discrimination Action?
A claim under the Robinson-Patman Act must meet the following requirements:
- Commodities - It involves the purchase of commodities.
- Like Kind & Quality - The commodities must be effectively the same.
- Injury to Competition - There must be some effect on the market (interstate commerce), in either:
- Primary line - The reduction of prices for a buyer in a specific region causes an injury to competitors in that market.
- Secondary Line - Buyers who are customers of a sellers supplier receive a particular discount.
This rule protects smaller buyers who cannot secure the advantages of larger buyers. Ensuring equal prices for resellers of commodities promotes competition.
What are some types of Required Price Discrimination?
Specifically prohibited conduct includes:
- Section 2(c) - limits brokerage commissions related to the sale of goods.
- Section 2(d) - outlaws granting promotional allowances or payments on good bought for resale, unless such allowances are available to all competing customers.
- Section 2(e) - prohibits giving promotional facilities or services on goods bought for resale, unless they are made available to all competing customers.
The statute also makes predatory pricing illegal outside of the context of Sherman Act 2, which primarily covers pricing below marginal cost for a prolonged period to drive out competition.
What are the Defenses to Price Discrimination Actions?
The Clayton Act does allow for defenses to or justifications for price discrimination, including:
- Cost Justification - Price differentials based on differences in the cost of manufacture, sale, or delivery of commodities are permitted.
- Good-faith Defense - A seller in good faith may meet the equally low price of a competitor.
Either of these defenses are a pro-competitive justification that might outweigh the restraints placed on competition.
Why do you think the Clayton Act focuses on vertical price discrimination by sellers of commodities? Do you think the limitations expressed above achieve these objectives? Can you think of other methods of regulating price discrepancies between purchasers?
ABC Corp is a seller of industrial cement. ABC prefers to sell in large quantities because of the lower warehousing and shipping costs. ABC particularly likes to deal with 123 Corp, which has its own warehousing and logistics system that ABC Corp may employ when selling 123 cement. As such, ABC provides special deals and incentives to 123 Corp, which has helped 123 Corp dominate the commercial construction market. If ABC's practices are challenged by the FTC, what would a court examine to determine legality?