Wal-Mart and price discrimination

 

Dukes, Anthony J

Business & Economics

 

Wal-Mart is currently the largest retailer in the world. With more than 4,500 stores, Wal-Mart generated $240 billion in sales, which accounted for a little less than 2.5 percent of the U.S. gross domestic product in 2002 (Bureau of Economic Analysis, U.S. Department of Commerce Website, and Fortune, February 18, 2003). Wal-Mart's success, however, is not universally admired. In fact, it is often accused of engaging in anticompetitive business practices.

 

Many smaller retailers and some consumer advocates allege, for instance, that Wal-Mart intentionally and unfairly quashes competition through extremely low prices. Because of Wal-Mart's size, the argument goes, it can afford to suffer extremely low prices until smaller businesses are forced to close their doors, leaving Wal-Mart as the only retailer in town. Antitrust economists refer to the anti-competitive practice of which Wal-Mart is accused as predatory pricing.

 

To convict a company of predatory pricing, it must be shown that the company prices its products below its costs. But a highly efficient distribution system and retailing expertise give Wal-Mart a cost advantage that enables it to price its products below the competition and still make a profit. In the view of antitrust law, this is healthy, rather than unfair, competition.

 

Unable to stop Wal-Mart on the predatory pricing front, competitors have recently put blame on its supply chain. For example, Mexican discounters Controladora and Gigante recently complained to Mexico's Federal Competition Commission (CFC) that Wal-Mart de Mexico pressures wholesalers and manufacturers into better prices (Business Week, September 16, 2002). The argument is that Wal-Mart, because of its size, is able to threaten abandonment to suppliers unless it receives lower prices. When suppliers cave in to Wal-Mart's pressure, Wal-Mart gains an additional competitive advantage because these suppliers are charging relatively higher prices to disadvantaged retailers for the same product.

 

If U.S. retailers, such as Kmart or Target, were to make the same allegation against Wal-Mart and its U.S. suppliers, how would U.S. antitrust law be applied?

 

Such allegations claim that retail suppliers are engaging in price discrimination, which is the practice of selling identical products to different buyers (retailers in this case) at different prices, where the price difference is not based on any cost difference. For example, a laundry-detergent manufacturer is price-discriminating if it sells its 64-oz container to Wal-Mart for a unit price of $1.79 but sells it to Kmart for $1.92.

 

The most relevant piece of antitrust legislation concerning this practice emerged from Depression-era sympathy for the local retailers, so-called mom-and-pop shops, against a new form of retailer: the chain store. The chain store in the early twentieth century bought in such large quantities that it could bargain with suppliers for cheaper prices. Because the traditional shops were not entitled to these bargain prices, chain stores' discounts were generally viewed as unfair.

 

The Robinson-Patman Act of 1936 was a result of this public outcry against the chain store. In fact, the Robinson-Patman Act is historically referred to as the "antichain-store act." The act prohibits sellers from charging different prices to different buyers for identical products when the effect might be injurious to competition. Thus, the act was intended to eradicate the competitive advantage of the chain store.

 

Note that a necessary condition for violation of Robinson-Patman is that competition has been injured. Therefore, Robinson-Patman does not make illegal the practice of price discrimination by retailers themselves. For example, consider a grocery store charging $3.99 for a box of cereal to one customer, but charging $3.49 to another customer who had clipped a coupon from a Sunday newspaper. In this case, the grocery store is not violating Robinson-Patman because these two customers do not compete in the resale of cereal.

 

Since 1936, the economic benefit of the Robinson-Patman Act has been debated. On the one hand, Robinson-Patman is one way to ensure that competitors will be protected from those whose only advantage is size. Thus, Robinson-Patman is seen as preserving competition, the most important force in a market economy.

 

Many antitrust economists disagree with this reasoning by arguing that the act rewards less-efficient competitors, imposes higher prices and lower sales, and provides less economic benefit overall.

 

Since passage of Robinson-Patman, many cases involving alleged violations of the act have been examined by the courts. And despite a few plaintiff victories, courts have mostly ruled in favor of the defendant.

 

The difficulty in winning such price-discrimination cases is revealed by the various courts' allowances for subtle legal defenses. A classic illustration of such a defense comes from a 1964 ruling involving the Borden Company. Borden, a maker of canned evaporated milk, made its product under two different brand labels. One was sold under the traditional Borden-brand label, and the other was sold under a private label, as a cheaper "house" brand for large grocery-store chains. The evaporated milk products, though chemically identical, commanded different prices, provoking the Federal Trade Commission to bring suit against Borden for injurious price discrimination.

 

In its defense, Borden conducted a study which indicated that consumers believed the Borden label brand to be of superior grade and quality relative to the private label. Borden could then claim that the products were not identical and, therefore, not subject to the conditions of Robinson-Patman. The court agreed with Borden and ruled in its favor.

 

If such rulings are any indication, it is unlikely that Wal-Mart and its suppliers will be found in violation of the Robinson-Patman Act, and that is probably a good thing. Antitrust policy, after all, was never intended to preserve inefficient competitors for the sake of competition.

 

But many argue that the victims of Wal-Mart's fiercely competitive business practices have been not only companies such as Kmart and Montgomery Ward, but also the small mom-and-pop stores. These small, local businesses are often a source of community pride and regionalism and are given sympathy for their sufferings.

 

If society values small, more traditional stores, then it is up to consumers, not antitrust policy makers, to preserve them. Many consumers have decided, for example, to pay a little extra, in terms of price and convenience, to support their local store. In doing so, they send a signal that things other than price or convenience are important in a market society.

 

That signal has been no stronger than in the cafe industry. Small, locally owned cafes are often seen as no match for the global corporate giant, Starbucks. Starbucks, like Wal-Mart, has been accused of strong-arming suppliers and property owners for better deals and, ultimately, lower costs of doing business relative to their smaller competitors. Indeed, hordes of coffee drinkers flock to Starbucks, allowing it to expand from 17 to 5,689 cafes in just fifteen years (Business Week, September 2, 2002).

 

But equal hordes have turned toward local independent cafes in solidarity against the corporate cafe. In fact, the number of independent coffee houses has grown concurrently with Starbucks' expansion (Wall Street Journal, September 24, 2002).

 

Wal-Mart and other industry big shots should, certainly, be scrutinized and their business practices kept in check. However, injurious price discrimination is not necessarily anticompetitive.

 

To be sure, if it were determined that Wal-Mart and its suppliers colluded, explicitly or implicitly, to price-discriminate with the intent to eliminate competition, then an antitrust case should ensue. However, such a case would involve antitrust legislation that forbids price fixing and other forms of restraint of trade, rather than issues of price discrimination covered in Robinson-Patman.

 

Despite the legal impotence of the Robinson-Patman Act, business managers should be aware of its existence. As the Wal-Mart case illustrates, lagging or resentful rivals may use the act as a misguided and wasteful way to battle a leading competitor.

 

Anthony J. Dukes is visiting assistant professor at Carnegie Mellon University's Graduate School of Industrial Administration (Business School). He holds a PhD in economics from the University of Pittsburgh and currently conducts research on the economics of advertising and commercial media.

 

Copyright National Forum: Phi Kappa Phi Journal Summer 2003

Provided by ProQuest Information and Learning Company. All rights Reserved

 

 

Cents-off coupons: consumer time and price elasticity of demand

 

In 2002, American businesses distributed 248 billion coupons with a face value of over $221 billion. Of these, consumers redeemed only 1.5%. An intriguing marketing issue is why sellers do not directly cut product prices. Considering the low redemption rate of coupons, direct price cuts would seem to be a more cost-effective way of promoting product sales.

From the consumer’s viewpoint, a major difference between direct price cuts and coupons is the time and effort needed to redeem a coupon. The more valuable a consumer’s time, the higher the cost of redeeming a coupon will be.

Consumers differ in their price elasticity of demand. Ideally, a seller would like to set prices so as to achieve lower margins from consumers whose demand is more elastic and higher margins from those with less elastic demand. To the extent that consumers whose time is more valuable are also those whose demand is less elastic, sellers can use coupons to implement indirect segment discrimination. Buyers whose time is more valuable will tend not to redeem coupons. Only those whose time is relatively cheap will use coupons.

By issuing coupons, a seller can target a discount at the consumer segment that is relatively more price elastic. In contrast, a direct price cut will benefit all buyers, regardless of their price elasticity. Hence, a direct price cut will be less profitable than the policy of issuing coupons.

 

Source: “CPG Coupon Volume on the Rise: NCH Study,” PROMO Magazine, April 11, 2003.

 

 

Price Discrimination of the Internet

 

So far the internet has been free of price discrimination. Some believe that is one of the chief reasons for its success. It was designed to be decentralized and "open": it carries all digital traffic, be it song or spam, for the same price. Yet many companies, which control the wires over which most consumers are connected to the internet, want to change this. They claim that charging different prices for different uses, such as telephone calls or downloading films, will give them the means and incentive to invest in better-engineered networks. So will price discrimination catch up with the internet too? Probably not, open networks are likely to win because they can attract more revenues from users and discrimination might turn most users away.

 

Source:" "Economist; 10/23/2004, Vol. 373 Issue 8398, p78-78, 1p, 1 graph, 1c.

 

 

“Textbook” price discrimination"

 

Jeffrey Alan Ackermann in his essay “Price Discrimination and the Internet: A look at the changing face of the college textbook industry” states: Textbook publishing companies generally publish two versions of a textbook: a domestic edition (sold in the United States) and an international edition (sold elsewhere in the world), with the domestic edition costing more. Prior studies have found that this is an example of third-degree price discrimination. (Clay and Tay, 2001; Cabolis et al, 2005).

 

Textbook manufacturers utilize a number of techniques to eliminate the market for used books: Publishers will come out with new editions, print hard cover and soft cover books with differing page numbers, and since professors select the books there is single choice as to the particular book available (creating a pseudo-monopoly) even though there are many equal books the student COULD chose from.

 

Ackermann suggests that there is a premium charged in the U.S. for textbooks, presumably because of a higher demand here but use of Internet trading site like ebay.com and half.com allow students to access cheaper international (English language) textbooks.

 

A more recent study, by Cabolis et al (2005) limited its comparisons to Amazon.com’s US and UK sites and looked only at economics textbooks and high-selling general books. It found that differences in price between the two countries were much larger for textbooks than for general books, with the US having higher prices for both. Among economic textbooks, those published by commercial presses had a larger difference in price between the US and UK than those published by university presses.

 

The argument that publishers face high fix costs and produce limited quantities resulting in madatory high textbook prices is address by alternative suggestions from The Advisory Committee on Student Financial Assistance in the document, “Turn the page: Making college textbooks more affordable” colleges could:

 

Strengthen the Market for Used Textbooks

• Used Textbook Initiatives

• Guaranteed Buy-back Program

• Book Swaps

 

Utilize Faculty Textbook Guidelines

• Submit Textbook Orders on Time

• Retain Textbooks for a Longer Period

• Know the Price of Textbooks

• Consider Less Expensive Alternatives

• Use the Same Textbook for Multiple Courses

• Retain Older Editions

 

Provide Key Information to Students and Parents

• Send Information before Term Starts

• Post Textbook Lists and ISBNs Online

 

Increase Library Resources

• Textbook Reserve Programs

• Faculty Use of E-reserves

• Donations of Textbooks to Libraries

• Textbook Lending Libraries

 

Adopt Alternatives that Lower Price

• No-frills Textbooks (Format Alternatives)

• Custom Textbooks (Content Alternatives)

• Buying Consortiums

• Profit Margin Reduction

 

Implement a Textbook Rental Program

• Full Rental Programs

• Partial Rental Programs

• Hybrid Rental Programs

 

Improve Related Financial Aid Policies

• Provide Emergency Vouchers, Credits, or Loans

• Create Need-based Grants for Textbooks

• Increase Financial Aid to Cover Textbook Expenses

 

Utilize 21st century technology instead of paper textbooks

• Electronic Textbooks

• No-cost Online Textbooks

• Open Educational Resources (OER)

• Print on Demand • Electronic Readers

• Online Collections of Educational Content

 

The decision to use paper Textbooks is a deliberate one and the publication industry utilizes price discrimination in order to maximize its profits.

 

Cabolis, Clerides, Ioannou, and Senft. (2005). “A Textbook Example of International Price Discrimination.” Yale ICF Working Paper No. 05-26.

 

http://www.econ.duke.edu/dje/2006/Ackermann.pdf

 

http://www.ed.gov/about/bdscomm/list/acsfa/turnthepage.pdf

 

Odlyzko, A.M. (2003). “Privacy, economics, and price discrimination on the Internet," ICEC2003: Fifth International Conference on Electronic Commerce, N.

Press, 355-366. http://www.dtc.umn.edu/��odlyzko/doc/recent.html.

 

Dubai's "The World"

Considering the book mentioned Dubai...

 

Dubai: The World Islands

The same company that brought us The Palm Islands, Al Nakheel Properties (Nakheel Corp), have done it again expanding their portfolio of man-made islands with this latest Dubai island project shaped like the continents of the world. The World will consist of between 250 to 300 smaller private artifical islands divided into four categories - private homes, estate homes, dream resorts, and community islands. Each island will range from 250,000 to 900,000 square feet in size, with 50 to 100 metres of water between each island. The development is to cover an area of 9 kilometers in length and 6 kilometers in width, surrounded by an oval shaped breakwater. The only means of transportation between the islands will be by marine transport.

Construction has begun on the $US 1.8 billion project which is set to be completed by the end of 2005. It will be located 4 kilometers off the shore of Jumeirah, close to the The Palm Jumeirah, between Burj Al Arab and Port Rashid of Dubai, United Arab Emirates (UAE). Each island will be sold to selected private developers and are expected to have pricing beginning at Dhs. 25 million (US$ 6.85 million).

 

Source: http://guide.theemiratesnetwork.com/living/dubai/the_world_islands.php

 

 

Mixed Bundling in Skin Care

 

Arbonne International, maker of skin care products uses mixed bundling as a pricing strategy for many of their product lines. This pricing strategy is a form of indirect segment discrimination. Mixed bundling allows for the supplier to sell products individually or in a bundle.0

 

One of their popular lines is the NutriMinC RE Anti-Aging skin care line. The line includes a variety of skin cleansers and lotions to protect the skin with anti-aging elements. Products in this line are priced from $33 to $79 when purchased separately. Arbonne offers a Skin Care Set priced at $298.50 which includes seven items. Purchased separately the consumer would spend $344 but with the mixed bundling pricing at a total of $298.50, a discount of 13% off the individual price.

 

Source: http://www.arbonne.com/products/anti-aging/nutriminc/index.asp

 

 

The Price of Money

 

As many homeowners will tell you, not everyone gets the same interest rates when applying for a mortgage. The rate you’re offered depends on your credit rating. This is an example of direct segment discrimination in the market of money, in this case in the form of home loans.

 

Looking at savings, money to be delivered at a future date, banks offer different rates – or prices – to different segments, in this case self-selected or indirect segment discrimination. The basis for segmentation is the amount of money and duration of time a person is willing to forego the use of that cash. A person willing to supply over a $100,000 will get a better rate than a person who puts in $40,000. A person willing to forego the use of funds for five years will receive a better rate than those willing to go without the funds for one year.

 

Those Sweet Mysteries of Life, Deciphered

By WILLIAM GRIMES

Published: January 25, 2008

The New York Times

“…a rational cost-benefit analyst lures single women to big cities like New York, where prospects of finding a mate with a big income are greater than in small towns. There they overpopulate the marriage market and suffer the Carrie Bradshaw blues. A look at an economic model called the Marriage Supermarket might give them pause.

Imagine 20 men and 20 women in a room. Those who pair off and leave the room together receive a prize of $100, with the money to be shared by the partners by negotiation. When the two sexes are equal in number, everyone finds a partner and the split is 50-50. Subtract one man from the equation, and competition for the remaining 19 inexorably drives down each woman’s share of the $100 to one penny — except for the 20th woman, who gets nothing at all. This is why Mr. Big wears a smirk.

The Marriage Supermarket provides a stark illustration of the power of small demographic shifts to produce grossly distorted outcomes.”