Price discrimination occurs when the same undertaking sells identical or similar goods or services at different prices and these differences cannot be motivated by different cost structures.
From an economic point of view, price discrimination can only take place if certain feasibility conditions are fulfilled. First, a price-discriminating firm should have some degree of market power. Second, the firm should be able to control arbitrage of its products. This condition implies that firms should be able to limit both (i) the ability of buyers to resell the firm’s products at prices below those charged by the firm (‘transferability of the commodity’) and (ii) the ability of buyers to purchase products targeted at other buyers (‘transferability of demand’). Third, price sensitivities should differ across buyers or units. Finally, firms must be able to link those price sensitivities to the corresponding buyers.
Firms may base their price discrimination strategies on a wide variety of criteria, including quantity, buyer characteristics (e.g. age or employee status), time (e.g. off-peak and peak periods) or geography (e.g. nationality or location).
To categorise different types of price discrimination, economists have conceived various taxonomies. The most widespread taxonomy was coined by Pigou, distinguishing between price discrimination of the first degree (where each buyer is charged their reservation price), second degree (where pricing depends on the sold number of units) and third degree (where each buyer group is charged differently).
Price discrimination could enhance or decrease social welfare, depending among other variables on the form of consumer heterogeneity, the products for sale and the available instruments for price discrimination. For instance, total welfare could expand under certain conditions if price discrimination enables undertakings to serve markets that would otherwise not be served. However, increased output by one firm does not necessarily expand total output as other firms may exit the market as a result. The welfare effects of price discrimination and any related policy recommendations therefore call for a casuistic approach.
Various legal areas are applicable to price discrimination, including legislation on consumer protection and commercial practices, EU free movement provisions, anti-discrimination laws, geo-blocking regulations, and competition law.
In the EU, Article 102 TFEU precludes abusive conduct by undertakings holding a dominant position on a relevant market. Subparagraph (c) of that provision explicitly prohibits firms from applying dissimilar conditions to equivalent transactions with trading parties if the latter are placed at a competitive disadvantage. While price discrimination can be exploitative, the wording of Article 102(c) TFEU suggests a focus on cases of secondary-line injury where exclusionary effects are felt by co-contractors of the dominant firm (C-82/01 P Aéroports de Paris; C-525/16 MEO). That said, firms generally have no incentive to distort competition between their trading partners. This is different when a dominant firm integrates vertically and thus competes with its own trading partners but, despite case law to that effect (C-242/95 GT-Link), it is debated whether Article 102(c) TFEU offers a solid legal basis for such cases.
Indeed, most price discrimination cases under Article 102 TFEU target primary-line injury where the dominant firm inflicts exclusionary effects on its competitors.
For example, extensive case law exists around rebates, discounts and bonuses. Quantity rebates—linked solely to the volume of purchases—are presumptively legal under certain conditions (C-23/14 Post Danmark II). By contrast, exclusivity rebates—conditional on the customer obtaining (almost) all requirements from the dominant firm—are presumptively illegal when preventing purchasers from dealing with competitors of the dominant undertaking (85/76 Hoffmann-La Roche). Nevertheless, when a dominant firm submits evidence that its rebates are incapable of restricting competition, the Commission must analyse the foreclosure effects in depth (C-413/14 P Intel). A third category of rebates, neither based solely on volume nor conditioned on exclusivity, may be abusive in case of fidelity-building effects (C-95/04 P British Airways; C-23/14 Post Danmark II). All circumstances are taken into account for the above assessments, including the retroactivity of rebates, the length of the rebate’s reference period or their market coverage.
Many other forms of abuse may also imply price discrimination and vice versa. For example, selective price cuts have been assessed with regard to average total costs (C-209/10 Post Danmark I) in a manner comparable to predatory pricing cases (C-62/86 AKZO). Vertically-integrated firms may charge downstream competitors more than their own downstream operations, though the assessment of such ‘margin squeeze’ conduct has centred around the as-efficient-competitor test and, as part of that analysis, the spread between wholesale and retail prices (C-52/09 TeliaSonera). Discriminatory prices can also be abusive when excessive in nature (2001/892/EC Deutsche Post). Finally, multi-product rebates or bundled discounts, where the sum of the prices of the separate products is higher than the bundled price, may be anticompetitive by excluding competitors who sell only some components of the bundle (Commission Guidance Paper 2009, para. 59).
Given its unique market integration objective, EU competition law has also been used to combat geographic price discrimination. For instance, Article 102 TFEU has targeted practices that artificially partition national markets (27/76 United Brands) and that impede parallel imports through dissuasive rebates (T-65/89 British Gypsum) or excessive pricing (226/84 British Leyland). Similarly, the EU’s ban on restrictive agreements and concerted practices, contained in Article 101 TFEU, precludes differential pricing practices which make it economically uninteresting for market operators to engage in parallel trade (80/789/EEC Distillers; IV/36.957/F3 Glaxo Wellcome). In addition, Article 101 TFEU prohibits deals between competing suppliers to price discriminate jointly against buyers by using the same methodology (74/431/EEC Papiers peints de Belgique) and restricts efforts by intermediaries to coordinate discounts charged by competitors (C-74/14 Eturas). EU competition law hence not only targets discriminatory prices directly but also affects the feasibility conditions for charging such prices (e.g. control of arbitrage).
In the US, the 1913 Robinson-Patman Act—as an amendment to the Clayton Act—specifically prohibits certain unjustified forms of price discrimination that injure competition. Even though this prohibition was enforced in the past (Morton Salt, 334 U.S. 37), it has now fallen into disuse as a potential result of its protectionist origins, complexity and narrow scope. That said, price discrimination—and rebates in particular—may still be captured by §§1–2 of the Sherman Act. The Supreme Court has held that volume rebates, or even cases of primary-line injury more generally, should be assessed in line with the price–cost test adopted in predatory pricing cases (Brooke Group, 509 U.S. 209). With respect to loyalty and bundled rebates, however, lower courts disagree on the preferred approach as some opt for a rule-of-reason-type analysis (Le Page, 324 F.3d 141 (3d Cir. 2003)) while others focus on price–cost comparisons (Peacehealth, 515 F.3d 883 (9th Cir. 2007)).