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Pricing, Ethical Issues In

Pricing, one of the four functions of marketing (along with product, place, and promotion), is a dynamic process by which buyers and sellers determine what, and how many, units of wealth should be exchanged for a needed product or service. Buyers and sellers have differing goals in this exchange process. Usually, buyers are interested in obtaining needed products and services at the lowest possible price, while sellers tend to concern themselves with maximizing their profits.

Price affects both the supply of, and the demand for, a particular item. Generally, higher prices encourage sellers to produce more of an item but discourage buyers from purchasing large quantities of the item. Contrariwise, low prices tend to whet buyer demand for an item while discouraging sellers from producing. There is a price point, called price equilibrium, at which the supply of and demand for an item are equal. At price equilibrium, buyers purchase as many units of production as sellers make available.

The ethical issues in pricing are similar to those governing other aspects of business and deal primarily with fairness—fair competition and fair treatment of buyers and sellers. Generally, any pricing practice that maintains the competitive nature of the market and is fair to market players is ethical practices that hamper free competition or unfairly treat specific constituencies of buyers or sellers are likely to be unethical.

Anticompetitive Pricing

Anticompetitive pricing practices impede the natural dynamism of a free market. Some anticompetitive pricing practices are illegal, in addition to being unethical. In price discrimination, the seller offers identical products or services at different prices. There are three types of price discrimination. Price may vary by customer, when the value of the product or service is subjective or demand is highly elastic. Price may vary by quantity sold, which allows the buyer to enjoy scale economies on large purchases. Price may vary by location or customer segment, which allows both the seller and the buyer to enjoy economies of location. From the seller's perspective, perfect price discrimination would allow the seller to charge each buyer the maximum price the buyer is willing to pay this form of price discrimination would create an infinite number of points along the demand curve at which the maximum price could be attained from various buyers, each involving a different quantity sold. In theory, perfect price discrimination could be attained at any level of seller output at which there is at least one buyer willing to pay the asking price for the good.

Many forms of price discrimination are ethical. For example, many restaurants offer a children's or senior citizen's menu. Supermarkets offer discounts to customers who use coupons or become price club members. Cinemas may have lower-priced tickets for matinees or for children. Price discrimination may occur even when the seller does not have a monopoly. In this instance, sellers operate in competitive markets but enjoy some degree of discretion in pricing due to brand loyalty, special product characteristics, or market segmentation.

Price discrimination may be predatory in nature, such as when prices are set below cost for certain preferred customers or with the intention of driving smaller competitors out of the market. Predatory price discrimination may violate specific laws, such as the Robinson-Patman Act, antitrust legislation, and Federal Trade Commission regulations. Determination of the legality or ethicality of pricing discrimination must be done on a case-by-case basis.

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