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Unit 12: Merchandise Pricing

the differing methods or quantities in which such commodities are sold or delivered. Under Notes
what conditions may these differences exist?

Notes It’s often less expensive per unit to manufacture, sell, or deliver large quantities
than small quantities. Manufacturers can achieve economies of scale through the longer
production runs achieved with large quantities.
Cost of selling to a customer also decreases as the quantity of goods ordered increases because
it costs almost the same for a salesperson to write a small order as a large order. Finally,
delivery or transportation expenses decrease on a per unit basis as quantities of goods ordered
increase. These exceptions give rise to quantity discounts, the practice of lowering prices to
retailers that buy in high quantities.

The differences in methods of sale that allow for differing prices refer specifically to the practice
of granting functional discounts, also known as trade discounts. Functional discounts are different
prices, or percentages off suggested retail prices, granted to customers in different lines of trade
(e.g., wholesalers and retailers). Wholesalers often receive a lower price than retailers for the
same quantity purchased. This is legal as long as wholesalers perform more functions in the
distribution process than do retailers. For instance, wholesalers store and transport merchandise,
and they use salespeople for writing orders and taking care of problems in the stores. Essentially,
manufacturers pay wholesalers for servicing retailers by giving the wholesalers a lower price.
With the growth of large chain retailers like Home Depot and Wal-Mart, functional discounts
become more difficult to justify. Wal-Mart performs virtually all the functions an independent
wholesaler provides. Therefore, Wal-Mart demands and should receive the same low prices as
wholesalers. These lower prices make it hard for smaller retailers to compete.
The second exception to the no-price-discrimination rule is when the price differential is in
response to changing conditions affecting the market for or the marketability of the goods
concerned, such as selling last year’s fashions at a lower price today than last month when they
were still this years fashions.
The third exception is when the differing price is made in good faith to meet a competitor’s
equally low price. Suppose, for example, that Ben & Jerry’s ice cream is experiencing severe
price competition with a locally produced ice cream in Wisconsin. Ben & Jerry’s are allowed to
lower its price in this market below its price in other markets to meet the low price of local
competition. In this case, market conditions have changed and Ben & Jerry’s have reacted by
meeting the competition’s price.
Large retailers often benefit from subtle forms of price discrimination. For instance, 25 bookstores
across the country have filed an antitrust lawsuit against their large competitors, Barnes &
Noble and Borders Group, Inc. They charge that the nation’s largest book retailers are in violation
of the Robinson-Patman Act because they illegally use their buying clout with publishers to get
special discounts and benefits not available to smaller rivals.
Unless a particular situation comes within one of the exceptions just discussed, retailers should
never ask a vendor for or accept a net price (after all discounts, allowances, returns, and
promotional allowances) that they know, or experience tells them, won’t be offered to their
competitors on a proportional basis for similar merchandise to be purchased at about the same
time.

12.3.1 Predatory Pricing

Predatory pricing is a particular form of price discrimination where a market-dominating firm
charges below-cost prices for some goods or in some areas in order to drive out or discipline one

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