POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Business Administration

Department of Marketing

Pricing Strategy
Topic: Ethical Issues in Pricing Strategy

Submitted by:
Vallespin, Vim Boom I.
BSBA MM 2-1P

Submitted to:
Ramos Jr., Felix
 Pricing, one of the 4Ps of marketing mix (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.

Most of the sellers rely on competition to reach their target goals. Usually,
competition ensures that the customers get best products in the best price deal. Hence
to cope up with their competitors, sellers adjust their prices/enter in a price war, play
around with prices in way affecting the customers which leads to unethical issues in
pricing. But, there are also sellers that practice ethical pricing strategies to earn profits
without defrauding competitors or customers.

Ethical behavior refers to what is good for individuals and society. Ethics is also
described as moral philosophy which addresses fundamental questions such as: How
should I live my life? That question leads to others such as: What sort of person should I
strive to be? What values are important? What standards or principles should I live by?
The simplest may be to say that ethics deals with “right” and “wrong.” However, it is
diffcult to judge what may be right or wrong in a particular situation without some frame
of reference.

So, any pricing practices that maintains the competitive nature of the market and is
fair to the market players is ethical; practices that hamper free competition or unfairly
treat specific constituencies of buyers or sellers are likely to be unethical. Pricing a
product ethically is a major decision for any business. Businesses who use ethical
pricing strategies to sell their products and earn a profit are far more respected than
those that defraud competitors or even customers.
Ethical Issues in Pricing Strategies
1. Anticompetitive Pricing
Anticompetitive Pricing refers to pricing practices in which a business may
engage to restrict competition in order to maintain or increase their relative market
position and profits without necessarily providing goods and services at a lower cost
or of higher quality. The essence of competition entails attempts by businesses to
gain advantage over rivals. However, the boundary of acceptable pricing practices
may be crossed if business contrive to artificially limit competition by not building so
much on their advantages but on exploiting their market position to the disadvantage
or detriment of competitors, customers and suppliers.

Forms of Anticompetitive Pricing Practices

a. Predatory Pricing

Predatory pricing involves charging very low prices which has the aim of getting
rid of the competitors so that the business can charge considerably higher prices
later. The predator is willing to sell at a loss or below cost for a period, in the hope
 that its rivals either go bust or decide stop selling that product. When competing
companies have left the market, the predator pushes prices back up.
Predatory pricing violates antitrust law. The concept is that a business that
engages in predatory pricing could force its competitors to close and thus create a
monopoly. Either way, it’s unethical in part because it is pricing to hurt competitors.

As soon as the dominant company has kicked out the newcomer, it regains its
monopoly position. This is bad for the consumer as a monopolistic marketplace
might allow the company that holds the monopoly to raise prices as they wish,
perhaps reducing consumer choice in the bargain. Its success in the price war
serves as a warning to any other commercial enterprise thinking of breaking into its
market.

Example:
Darlington Bus Wars in 1994 in Northern England. It refers to a competition
between the Darlington Bus Company and Busways.

b. Price Discrimination
Price discrimination is when a sellers offers the exact same product or service at
different prices to different people. Instead of the same price across all markets,
sellers adjust prices based on what they think the customer will pay.

Types of Price Discrimination

There are three types of price discrimination: first-degree or perfect price
discrimination, second-degree, and third-degree.

i. First-degree Price Discrimination

First-degree discrimination, or perfect price discrimination, occurs when a
business charges the maximum possible price for each unit consumed.
Because prices vary among units, the firm captures all available consumer
surplus for itself, or the economic surplus. Many industries involving client
 services practice first-degree price discrimination, where a company charges a
different price for every good or service sold.

ii. Second-degree Price Discrimination

Second-degree price discrimination occurs when a company charges a
different price for different quantities consumed, such as quantity discounts on
bulk purchases.
For example, Men’s Wearhouse is just one example of a retailer that offers
deals such as, a suit at $299, but a discount when two are purchased ($500 for
2).

iii. Third-degree Price Discrimination

Third-degree price discrimination occurs when a company charges a
different price to different consumer groups.
For example, a theater may divide moviegoers into seniors, adults, and
children, each paying a different price when seeing the same movie.

Example of Price Discrimination

Victoria’s Secret was inadvertently a pioneer in this field, when it tested price
discrimination in 1996 through a mail order campaign. It mailed different versions of
the same catalog, with different prices offered for the same item to different groups
of consumers. By doing this, it could essentially create a real demand curve and
assess the willingness to pay of different customer segments. One consumer was
not happy to discover this, and filed a class action lawsuit claiming mail fraud
against Victoria’s Secret but she lost. Retailers can distinguish between customers
and price differences (as long as they do not discriminate based on impermissible
attributes) and dynamic pricing is perfectly legal. To further drive the point home, the
Judge even issued sanctions on the Plaintiff’s attorney for filing a frivolous lawsuit.
The pharmaceutical industry experiences international price discrimination.
Drug manufacturers charge more for drugs in wealthier countries than in poor ones.
For example, the United States has the highest drug prices in the world. On average,
 Europeans pay 56% less than Americans do for the same prescription medications.
However, in many countries with lower drug costs, the difference in price is
absorbed into the taxes which results in lower average salaries when compared to
those in the United States.

Ethical or unethical?
There’s a study in University of Pennsylvania entitled Open to Exploitation:
American Shoppers Online and Offline by Joseph Turow, Lauren Feldman, and
Kimberly Meltzer which addressed online price discrimination. It was revealed that
the majority of those surveyed believed that price customization was illegal, or
strongly believed it ought to be. The truth is, it’s usually legal. Price discrimination
becomes illegal if it’s done on the basis of race, religion, nationality, or gender, or if it
is in violation of antitrust or price-fixing laws. Price discrimination become a ethical
issue as customers don’t know that they are getting different prices.

c. Price Fixing
Price fixing represents as an agreement between businesses who are on the
same market side regarding the charge of a certain price of a product or service
among them to avoid price competition. This is an act of collusion and is banned in
many countries and regions. According to Jobber (2010), price fixing is unethical
because it restrains the consumer‟s freedom of choice to find a better deal on a
specific product, as those businesses have colluded to fix the price, and interferes
with each businesses’ interest in offering high quality products at the best price.
Price fixing might be viewed ethical, however, if it ensures a fair profit and avoid
price wars that might lead to bankruptcies and unemployment in society.

Example:
 Panasonic. Sanyo, and LG Chem was involved in a price fixing conspiracy.
 Loblaws Company, Walmart Canada Corp., Sobeys Inc., Metro Inc., and Giant
Tiger Stores, companies who sells bread in Canada, are involved in a bread
price fixing scheme.
 From a legal perspective, price fixing often runs a foul of antitrust laws. A
business is supposed to set prices independently from competitors. Businesses
shouldn’t agree to certain prices with competitors as a way to control the market.
The goal here is to protect consumers and ensure that prices are based on a free
market, not a fixed one.

2. Unfair Pricing
Unfair pricing practices are also unethical. Unfair pricing techniques are those
that involve fraud or manipulation, or violate the requirement that fair market
exchanges be informed and voluntary. Unfair pricing also exploit buyers in case of
significant time pressure beyond the buyers’ control, emotional distress and lack of
information or experience, or where the buyer’s normal bargaining power is diluted
in a situation of emergent need (Sage 2012).

Forms of Unfair Pricing Practices

a. Pricing Gouging
Price gouging means a company may raise prices of goods or services that are
temporarily in high demand. This is sometimes seen in the wake of emergency
situations. Example of price gouging, throughout history, enterprising people have
recognized the advantage of having certain supplies or products, or being able to
provide certain services, in times of upheaval. For instance, when a disaster makes
all of the water in a given area undrinkable, a shopkeeper who has a large supply of
bottled water might make a very good profit, and it is illegal in most jurisdictions. It is
taking advantage of a bad situation, raising prices for much-needed supplies or
services to an unfair, or even unethical level.

b. Deceptive Pricing
Deceptive pricing occurs when a seller intentionally misrepresents the total cost
of an item, makes incorrect comparisons between the seller’s price and the prices
offered by competitors, or significantly and artificially inflates the asking price of a
product or service with the intention of offering a deep discount for the item. In such
 a case, the bargain received by the purchaser is a false one, unless the original
price is one at which the product was offered for a reasonably substantial period of
time or a significant number of items were sold for the original price. In another form
of deceptive pricing, products or services are sold as a set; buyers are not given an
opportunity to purchase each item independently or decline those items for which
they have no desire. The buyer ends up paying for items not needed or wanted.

Hidden costs are another type of deceptive pricing, in which the costs of the item
are not readily apparent on examination of the item or the accompanying
documentation. Undisclosed shipping or handling costs, finance charges, or
maintenance fees are some examples of hidden costs. Failure to disclose such
costs is illegal in many states. In short, deceptive pricing occurs anytime the price of
a product or service is misrepresented, is incorrectly compared with the price of a
competitor’s product, or includes items the buyer does wants but is not given the
right to refuse or when all costs are not revealed and made explicit to the buyer at
the tome of purchase.

c. Manipulative Pricing
Manipulative pricing refers to price points that are set to make buyers think that
the actual price of an item is lower than it really is. Odd-even pricing is one kind of
manipulative pricing, wherein an item is priced in such a way that buyers think the
item costs less than it really does. For example, a seller might price an item at $9.99
to lead buyers to believe that the price of the item is significantly less than $10.00. In
another form of manipulative pricing, sellers allow buyers to purchase goods and
make payments over time, in an attempt to make buyers believe the item costs less
than it would if paid for in one lump sum. For example, an item might be sold for
$50.00, or for five payments of $9.99. The five-payment scheme might confuse
buyers into believing that paying for the item in increments is a significant savings
over making just one payment. Another form of manipulative pricing involves setting
the price of an item and then offering a seeming discount for volume purchases. The
seller might price price a particular item for $5.00 or two for $9.99. Again, this form of
 pricing may confuse buyers into thinking purchasing two of the item results in
savings, when it really does not.

References:

14th Congress - Senate Bill No. 129 - Senate of the Philippines. (n.d.). Retrieved from
https://www.senate.gov.ph/lis/bill_res.aspx?congress=14&q=SBN-129

Garcia, C. C. (n.d.). Ethical Issues in Pricing. SAGE Encyclopedia of Business Ethics

and Society. Doi: 10.4135/9781412956260.n645

Guo, V. (n.d.). Pricing Ethics: 5 Ethical Issues in Pricing Strategies. Retrieved from
https://www.priceintelligently.com/blog/bid/164830/5-must-know-pricing-strategy-
ethics-issues

Jobber, D. (2010), Principles and Practice of Marketing, 6th Edition, McGraw Hill
Higher Education, London, UK

Press Release - Prohibit price gouging during times of disasters - Villar. (n.d.).
Retrieved from https://www.senate.gov.ph/press_release/2007/0821_villar1.asp

SAGE Brief Guide to Marketing Ethics. (2012). doi: 10.4135/9781452243962

Team, C. (2016, January 14). Price Gouging - Definition, Examples, Cases. Retrieved
from https://legaldictionary.net/price-gouging/What is Ethics? (2010, December
21). Retrieved January 18, 2020, from
https://www.ethicssage.com/2010/12/what-is-ethics.html