The Clayton Act

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From the course by University of Virginia

Market and Competition in Pricing Strategy

70 ratings

University of Virginia

Market and Competition in Pricing Strategy

70 ratings

Course 3 of 4 in the Specialization Pricing Strategy Optimization

If you haven’t considered what the competition is charging, you may not be maximizing your revenue. Spend time analyzing the market and you can influence price and improve margins. In this course, we'll show you how to implement competitive pricing and avoid common legal pitfalls of market-based pricing. You will also learn how to predict, influence and respond to competitors’ pricing moves. Led by Darden faculty and Boston Consulting Group global pricing experts, this course provides an in-depth understanding of market-based pricing and how to use it to capture more revenue.

From the lesson

Understanding the Playing Field

Welcome! Competitive pricing is all about setting prices based on what companies with similar products and services charge. To use this approach effectively, you have to understand the playing field. In particular, you need to know general legal parameters that guide competition in the market place. In this module, you'll get basic background knowledge so that you can use market knowledge in your pricing strategy and still stay on the right side of antitrust law. Then Thomas will join you to introduce the competitive pricing framework , which you can use to assess pricing options, anticipate your competitors' pricing strategy, and determine whether to price to competition or to elasticity.

Legal Structures Related to Pricing4:02

The Sherman Antitrust Act4:25

The Clayton Act4:33

The Robinson-Patman Act3:50

Common Practices & Shifts in Interpretation6:19

Meet the Instructors

Jean Manuel Izaret
Senior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Ronald T. Wilcox
NewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Marketing
Thomas Kohler
Associate Director, Pricing
Marketing, Sales & Pricing Practice

Now I want to talk to you about the Clayton Act.

The Clayton Act is basically a refinement of the Sherman Antitrust Act.

It tells companies more specifically what's legal and

what's illegal in terms of pricing activities in these markets.

Now what does it prohibit?

It prohibits certain types of price discrimination, and in particular,

price discrimination between different purchasers

if such discrimination substantially lessens competition.

You're just not allowed to do it.

Now generally, the courts interpret this as price discrimination in business to

business markets.

So if one business is selling to another business,

you're generally not allowed to do price discrimination.

Conversely, in this course we've talked a lot about

price discrimination in business to consumer markets.

That's generally okay.

Some state laws prohibit that, but not a lot.

In general,

you're allowed to price discriminate in business to consumer markets.

You're allowed to offer student discounts, or

senior citizen discounts because they're a form of price discrimination.

The reason the courts think that's okay and the regulatory structure allows it

is because in price discrimination in business to consumer markets,

it's generally the case that people who are poorer, or

at least have less ability or willingness to pay, pay lower prices.

Conversely, in business to business markets,

courts worry that the big players will get the better terms of trade,

the better prices, because they'll have the negotiating power.

And that could become anti-competitive.

So that's why B2B price discrimination is generally illegal.

Now the Clayton Act also prohibits tying arrangements.

Now what are these?

That's an agreement to sell one product but

only under the condition that the buyer purchase an additional product, or

at least won't purchase it from another competitor.

So let me give you the provisions of this and then I'll give you a quick example.

So here are the provisions.

Here's basically the outline of tying arrangements.

First you have to have two separate products or services.

And the purchaser of the tying product, the purchase of that product is

conditioned on the additional purchase of the tied product.

And the seller has to have sufficient market power in the market for

the tied product.

So that sounds like a big old mess, but here's I think a clear example.

Suppose you have a company that provides home high-speed internet access, and

they're the only company in the area that does that.

If you don't buy high-speed internet access from them,

you can't buy it from anyone else.

And they come to consumers and

say, we'll sell you high-speed internet access but only under

the conditions that you buy landline telephone service from us as well.

In that case, they have monopoly power over home high-speed internet, and

they're using that tied product to tie a product, in this case,

home landline service that some consumers may want, and may not want.

This may constitute a violation under the Clayton Act.

Now in the US Constitution the only way for

the federal government to regulate this is if a not insubstantial amount of

interstate commerce in the tied product market is affected.

This is generally known as the Interstate Commerce Clause.

It is unique to the United States.

And it does mean that courts have to show that this activity is

happening in a lot of different states in order to be able to deem it illegal.

A famous case that involved these kind of tying arrangements

was the Department of Justice versus Microsoft Corporation.

In this case, Microsoft tied it's web browser to it's operating system,

such that to use the browser one had to purchase the operating system.

And the courts found that that was an antitrust violation.

They were worried about both prices and innovation in that marketplace.

And they came down against the Microsoft Corporation.

So what are the big Clayton Act takeaways?

There are really two.

First, avoid tying your pricing because that may be found illegal.

And be careful with price discrimination in B2B markets.

You might want to do it, but you might do it in a way that's illegal.

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