Illegal and Unethical Pricing Tactics | Sample Business Plan

Unethical Pricing Tactics


 

Price Fixing

 

When two or more companies come together to agree on a price they will charge for a product, they are considered to be price fixing. The same holds true when they agree to placing bids on a contract. An example of a price fixing scheme is as follows:

 

Company A and Company B, two competing pipe manufacturers, meet to discuss an upcoming governmental contract. An executive from Company A concedes to an executive from Company B, stating he will forego this contract and add a 7% markup on this bid to ensure Company A gets the bid, on the condition that Company B reciprocates on another governmental contract opportunity. The two agree and Company A is awarded the contract based on the lower bid. The Sherman Act and Federal Trade Commission Act make price fixing illegal

 

Price Discrimination

 

In short, price discrimination occurs when a seller charges different prices to two or more buyers for the same product. The Robinson-Patman Act of 1936 establishes the legal guidelines for price discrimination. Per the Robinson-Patman Act of 1936, a company cannot sell to two or more buyers, within a reasonably short period of time, commodities (not services) of similar quality and grade at different prices where it would result in substantially less competition. A seller also cannot offer 2 buyers different supplementary services. Additionally, the act makes it illegal for a buyer to use their buying power to force sellers into offering services or prices that may be discriminatory. In specific, for a violation of the Robinson-Patman Act to justify legal pursuit, the following must be present:

 

1) Price discrimination
2) The sale must occur in interstate commerce
3) The seller makes 2 or more transactions where price discrimination is present within a reasonably short period of time
4) The products must be tangible goods/products
5) The products sold must be similar in quality and grade
6) The transaction must create substantial competitive harm

 

Predatory Pricing

 

When a company enters a product market and charges extremely low prices with the intention of driving competitors out of that market or out of business, and then increases prices once competitors have been put out of business, it is considered predatory pricing. The Sherman Act and Federal Trade Commission Act were established to prevent such practices.

 

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