Price Discrimination and Anti Trust (Overview)

Definition
Price discrimination (PD) can be defined as set different prices for identical products (goods or services) to different groups of consumers.

There are three types of price discrimination in common which can be explained as follows.

• First degree PD is used by producers to equate all consumer surplus usually using fixed charge and variable charge.  
• Second degree PD. This type refers to charging price based on quantity demanded by customers. Usually this follows declining block price as demand increases (additional) the price drops.
• Third degree PD. It happens when price is charge based on customer segmentation e.g. groups of age, income, etc. 

In the USA to protect consumer from harmful effect of PD the Robinson Patman Act (RPA) was issued amended Clayton Act. the RPA states that it is prohibited to a seller from charging buyers at different prices for goods of “like grade and quality” where the effect may be to weaken competition. Effects to the competition can be distinguished into (i) Primary line - injury to competition in the seller’s own market and (ii) Secondary Line - injury to competition in the buyer’s market.

Two major cases had been brought to the court are:

• Utah Pie case. In this case a small frozen dessert pie manufacturer in Salt Lake City, Utah Pie Company, brought the suit against three large rivals: Continental Baking, Carnation, and Pet Milk. The three large rivals had manufacturing facilities in California, but not in Utah. Hence, when Utah Pie opened its frozen pie plant in Utah, it obtained a significant cost advantage over its larger rivals. 
• Morton Salt case. In the 1948 Morton Salt case is the landmark case involving secondary-line discrimination. Morton Salt sold its Blue Label salt to wholesalers and to chain stores according to specific discounts based on quantity sold. It was find out that Only five customers ever bought sufficient quantities of salt to obtain the most cheapest price. These were large chain stores.