This summary on price discrimination is for educational purposes, not meant to be legal advice.
Price discrimination involves charging a purchaser a different price for the same product that is sold to another purchaser.
Example: Competitive upgrade programs, which involve offering lower pricing to certain customers, are a form of price discrimination.
In the United States, price discrimination is prohibited when the discrimination (a) is between purchasers of products (not intangibles, such as services) that are of like grade and quality, and (b) results in substantial injury to competition.
Like grade and quality relates to the physical characteristics of products. Significant commercial differences in the characteristics of goods may justify price differentials.
Competing customers of a manufacturer may be business partners, such as distributors and resellers, who compete in the resale of the manufacturer’s products of like grade and quality at the same functional level of distribution and at the same geographical region, regardless of whether they purchase directly from the manufacturer or through an intermediary.
Customers of the same functional level and geography who purchase products for resale, should not be subject to price discrimination unless the price differentials reflect costs of dealing with different buyers (such as sale or delivery costs) or attempts to meet (but not beat) a competitor’s equally low prices.
Example: Distributors of the same products in the same geographic areas should not be subject to price discrimination, but distributors who do not compete with resellers at the same functional level or in the same geographic areas, may be subject to price discrimination.
Promotions should be made available to all company business partners who are at the same functional level on equal terms. This may require offering alternative terms and conditions under which business partners can participate.
Example: If a company has direct resellers reselling exclusively within a certain geographic area, and other resellers within the same area purchasing through distributors, the company may lawfully engage in a promotional campaign confined to the geographic area, provided that it affords all of its resellers within the area the opportunity to participate, including those that purchase through distributors.
When price discrimination reflects the different costs of dealing with different buyers, different categories of buyers may be charged different prices, but buyers in the same category should not be discriminated.
Example: Company launches a swap program. Customers who have licensed competitive products are able to exchange their licenses to the competitive products for licenses to Company’s products for free. Company can structure the program to exclude enterprise customers who generate $X or more revenues each year, as long as it excludes all such customers who are in the same category. Excluding such customers would not be considered unlawful price discrimination if these enterprise customers usually obtain discounts that are not available to customers who generate less than $X revenues each year. Further, Company can structure the swap program to exclude customers who generate less than $Y revenues each year, as long as it excludes all such customers in the same category. Excluding such customers would not be considered unlawful price discrimination because allowing such customers to participate in the swap program would not be cost efficient.
Price discrimination is allowed when a disfavored purchaser does not suffer competitive harm in relation to the purchaser who pays a lower price. This usually occurs when purchasers are ultimate end users, are not of the same industry, or do not compete in the resale of the product. Even if purchasers compete in the same industry, a product needs to have a major impact on the profitability of the purchasers in order for there to be unlawful price discrimination.
Example: Company launches a swap program where customers who have licensed competitive products are able to exchange their licenses to the competitive products for licenses to Company’s products for free. Customers who have not licensed competitive products are charged Company’s full license fees. Even though customers who have not licensed competitive products pay a higher price for Company’s products than customers who have licensed competitive products, there is no unlawful price discrimination if Company’s product is unlikely to be used as part of the manufacturing process in either of the customer categories. The higher price that the customers who have not licensed competitive products pay for Company’s product does not significantly influence the production price of customers’ commodities. The product is licensed for internal use, and is not at the heart of the production process of the customers’ goods.
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