Price Discrimination 2005

On almost all markets, companies use price discrimination, i.e. different customers pay different prices for in principle the same good. Sometimes certain groups get a better price; students, pensioners or members of certain organisations. Sometimes the consumers can themselves influence what price they get through their buying behaviour – such as a lower price if they buy larger volumes or are out in good time.

Price discrimination most often takes the form of discounts – such as loyalty discounts. A loyalty discount is sometimes to the benefit of the consumers, but can also be used by a dominating companies to obstruct functional competition. The difficult task of competition authorities is to separate the good cases from the bad.

In the anthology The Pros and Cons of Price Discrimination some of the world’s foremost researchers in the area discuss the pros and cons of price discrimination.

  • Damien Geradin (University of Liège and the College of Europe) and Nicolas Petit (University of Liège), who are both legal scholars and experts of competition law, analyse the scope of Article 82 (c). They distinguish between three main types of price discrimination that can be found in the EC competition law practice.
  • Simon Bishop focuses on one specific form of price discrimination: loyalty rebates. Bishop begins by reminding the reader of some of the pro-competitive reasons for using loyalty rebates: to give the retailer (or, more generally, the downstream firm) stronger incentives to provide complementary services, to reduce the problem of double marginalization and to allow efficient recovery of fixed costs.
  • Yongmin Chen (University of Colorado) focuses on price discrimination in a symmetric duopoly situation. In the first of the two models he presents, the products of the two firms are initially identical, but once a consumer has bought from one of the firms, the consumer will experience switching costs if he or she buys from the other firm in the next period. This creates a lock-in situation, but it also creates a temptation for the two firms to try to “poach” each others customers.
  • Thomas P. Gehrig (University of Freiburg) and Rune Stenbacka (Swedish School of Economics and Business Administration, Helsinki), in the fourth contribution to the volume, take a step back and ask: What are the arguments in favour of – and against – price discrimination? They identify a number of arguments in both directions.
  • Anne Perrot (Conseil de la Concurrence, France) argues that competition authorities´ policies towards price discrimination should by governed by the effect of a particular type of price discrimination, not by its form. To set the stage for such an analysis, she provides an overview of what economic theory has to say about price discrimination.
  • David Spector (Centre National de la Recherche Scientifique, Paris) analyzes different companies’ strategic use of price discrimination. He argues that a one-sided condemnation of price discrimination can have dire consequences, because it can in fact have some positive effects.

 

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