Hands off! A Case for Price Discrimination

Everyone knows that discrimination is wrong. Of course, everyone in that circumstance would be assuming that discrimination was referring to judging people by their underlying traits, but it becomes very easy for the meaning of the word to take on a negative connotation that can be used to inform policy in unhelpful ways. Price discrimination is often maligned as a tool of big business to keep small businesses in their place or drive them out of the market. Price discrimination by wholesalers directly cuts costs for bigger businesses, so it is easy to see how it could be perceived as an unfair advantage. The Robinson-Patman act was designed to protect small local grocery stores from chain grocery stores driving them out of the market during the Great Depression. The chain stores had access to numerous deals which made the small businesses angry, as they felt they had no way to hold on to their extremely price sensitive customers. The Robinson Patman act was passed under the idea that big businesses would use their price-discrimination advantage to keep their prices low, and once the competing small business left the market, they would remove their previous discounts and charge steep markups. While small businesses have numerous hurdles to competing with larger businesses, the right price discrimination should be protected. 

Price discrimination is often extremely helpful to consumers. The people who care the most about price will typically choose to go to large discount focused retailers. These chains are those most likely to benefit from price discrimination. They are often able to offer discounts as a result of their bargaining power and attractiveness to wholesalers. It should come as no surprise that their lower costs translate to lower prices. Because of price discrimination, the market is able to cater more effectively to consumers who care about savings and consumers who care more about other factors. Additionally, price discrimination’s allowance for lower prices means that all types of retailers will feel downward price pressure when compared to a world without price discrimination. Even stores who don’t receive the benefits of price discrimination will still be incentivized to get as close to the low prices of their competitors as possible. Even when smaller retailers cannot offer prices as low as their competitors, they will be more likely to offer consumers more benefits through convenience or atmosphere. Consumers buying from high end retailers will benefit even though the high end retailers are often paying more than they would be in a price-discrimination free regime. Consumers of all kinds benefit from price discrimination.

Businesses benefit from wholesaler price discrimination on multiple levels. Wholesalers benefit from being able to accurately reflect the lower costs of larger retailers. Larger retailers allow them to spend less time negotiating and bargaining. Additionally, large retailers will often allow for lower transportation costs as they have distribution networks in place already and can forecast their schedules longer into the future. Large retailers benefit from lower prices and the ability to be recognized for their benefit to the supplier. Small retailers benefit because price discrimination often means that they differentiate themselves from bargain businesses more clearly. The inability to keep up in price with big businesses that they can focus on providing an exceptional customer experience or on local goods that larger companies can’t acquire as easily. If small businesses and large businesses just tried to compete on a cost level, even with no price discrimination, the large companies would win from their numerous organizational and structural benefits, so the sooner the small businesses pivot to some differentiated service or market, the better. There is no world that should be sustained in which small businesses are expected to compete with chain businesses on a mere price saving level.

Focusing on price discrimination has clouded the ability to see the ways in which larger or chain businesses are actually competing unfairly through intermingling with the creation of government regulation.  While price discrimination in favor of larger businesses definitely hurts the profits of some small businesses in the short run, large businesses are supported most uniquely through special regulatory treatment as a result of lobbying. A sphere of enterprise clouded with excessive regulation benefits no one more than the companies that have the ability to deal with that regulation. Most countries are skewed in favor of large businesses, but that effect can only grow as the overreach of government into business grows. Price discrimination provides either a positive or neutral effect to businesses and consumers, but trying to end it will be unambiguously bad as it will only increase the root cause behind the most unfair big businesses.