A Social Appraisal of Differential Pricing

Abstract

THE REMARKS that follow will be addressed to the questions: When is it sound public policy to have two different prices for the same or goods or services? When is a price differential between the sales of the same goods or services, or between the sales of two goods or services, contrary to public policy? The expression similar goods or services in these questions is intended to apply to cases in which each product or service may be thought of as consisting of an identical component, A, plus a differentiated component, B, and in which the cost of the differentiated component, B, is much less than the cost of component A. We shall inquire what economic theory can contribute by way of answer to these questions. The subject of price differentials is a broad one and it is proposed to limit the problem before us by several somewhat arbitrary exclusions. Price differentials may arise as between two organized markets in each of which there is effective competition both among buyers and among sellers. Price differentials may also represent seller policy in cases where the seller's situation may fairly be described as one of monopolistic competition. Again, price differentials may represent buyer policy where the buyer's position is one of monopsonistic competition. We shall confine our attention largely to the second of these three situations, viz. to price differentials which represent seller policy. The subject before us may be still further limited by excluding from any but incidental consideration seller price differentials of certain types. It is proposed to exclude, first, cases where the price differential represents a substantial difference geographically in the points at which delivery takes place. Second, it is proposed to exclude price differentials as between transactions separated in time, i.e., time differentials and price changes. Third, it is proposed to exclude price differentials in cases where the particular sale is tied in some way to other transactions between the buyer and seller as, for example, in the case of an exclusive dealer arrangement. Fourth, it is proposed to exclude price differentials as between different sellers.