Noncost Factors in Pricing Decisions

Learning Objective 7 Explain the effects of legal restrictions on pricing and the broader notion of price discrimination

• limit the ability to price below costs (predatory pricing) or in coordination with competitors (collusive pricing) or to charge higher prices in the United States than in a home country (dumping)
• charging different customers different prices for the same product—for example, when orders arrive as demand approaches capacity limits (peak-load pricing)

We have seen so far that cost is a major factor in setting prices. We now explore how legal, political, and economic considerations influence firms’ ability to set prices in relation to their cost of producing and delivering products and services.

Predatory Pricing

In the United States, antitrust laws, such as the Sherman Act, the Clayton Act, the Federal Trade Commission Act, and the Robinson-Patman Act, mandate that prices must not be predatory. A company engages in predatory pricing when it deliberately prices below its costs in an effort to drive competitors out of the market to restrict supply and then recoups its losses by raising prices or enlarging demand.^*

The U.S. Supreme Court established the following conditions to prove that predatory pricing has occurred:

• The predator company charges a price below an appropriate measure of its costs, generally taken to be short-run marginal or average variable costs.
• The predator company has a reasonable prospect of recovering in the future, through larger market share or higher prices, the money it lost by pricing below cost.

The need to demonstrate both of these conditions has generally made it very difficult to prove that companies have engaged in predatory pricing.^*