Teaching Consumer Price Discrimination: An Interdisciplinary Case Study for Business Law Students

• Published date: 01 June 2014
• Author: Matthew A. Edwards
• DOI: http://doi.org/10.1111/jlse.12017
• Date: 01 June 2014

Journal of Legal Studies Education

Volume 31, Issue 2, 291–324, Summer 2014

Teaching Consumer Price

Discrimination: An Interdisciplinary

Case Study for Business Law Students

Matthew A. Edwards∗

I. Introduction

Few business decisions are as important and challenging as a firm’s choice

of how to price its goods and services.1Aside from the obvious need to

cover costs and provide for an acceptable profit, a firm must take care not to

alienate its customers through pricing practices that create the perception

of unfairness or inequity.2Price discrimination—charging different prices

to different consumers for the same good or service3—is one such practice

∗Associate Professor of Law, Zicklin School of Business, Baruch College (CUNY). Aspects of this

article were developed during a summer faculty workshop on case studies at Baruch College. I

want to express gratitude to my colleagues who participated in that seminar, as well as to Sandra

Mullings, Debbie Kaminer and Jay Weiser, all of whom provided helpful feedback on an earlier

version of this article.

1See Robert L. Phillips, Pricing and Revenue Optimization 1 (2005) (noting that “pricing

decisions are commonplace, they can be complex and that they are unusually critical determi-

nants of profitability”).

2Id. at 301 (explaining that when pricing practices are perceived as unfair “there is a chance

that buyers may decline to purchase from a seller either now or in the future for reasons that

might be totally unrelated the absolute price”); Jodie L. Ferguson et al., Procedural and Distributive

Fairness: Determinants of Overall Price Fairness,J. Bus. Ethics (forthcoming 2014) (manuscript at

2), originally published online April 11, 2013 (“[C]onsumers judge whether an offered price is

fair, but they also may judge the fairness of the price-setting practice, procedural fairness, separately

from the fairness of the offered price, outcome fairness.”) (emphasis in original).

3The economic definition of “price discrimination” is provided infra notes 27–31, and accom-

panying text. Other closely related terms in the literature include differential pricing, dynamic

pricing, and revenue management. See Adrian Palmer & Una McMahon-Beattie, Variable Pricing

Through Revenue Management: A Critical Evaluation of Affective Outcomes,31Mgmt. Res. News 189,

190 (2008) (noting that “[r]evenue management has been widely adopted in the airline, hotel

and car rental sectors, among others”).

C2014 The Author

Journal of Legal Studies Education C2014 Academy of Legal Studies in Business

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that threatens to undermine consumers’ trust in the seller.4The risks of

consumer price discrimination, however, present a bit of a puzzle. After all, if

we put aside the negative connotations of the word “discrimination,”5price

discrimination is a pervasive feature of the business landscape. Myriad firms

charge consumers different prices for the same or nearly the same goods and

services. No one is surprised when they learn that someone else got a better

deal on the same new car or shocked when they see senior citizen discounts

at the movie theater. Only a sociopath would demand that the elderly be

compelled to pay the same amount to see Transformers IV in 3D.

Nevertheless, it is generally agreed that price discrimination can, in

some circumstances at least, be an extraordinarily unpopular business prac-

tice.6The perils of price discrimination are well illustrated by the Ama-

zon.com case. Although the incident is almost fifteen years old, it has become

the standard reference in law review7and business literature8on the risks

of consumer price discrimination. The facts of the controversy are rather

simple. In late 2000, customers discovered that Amazon.com was varying its

prices online for the exact same products.9Rumors swirled that the price

customization was based on demographic data that the e-commerce giant

4See Una McMahon Beattie et al., Does the Customer Trust You?, in Revenue Management: A Prac-

tical Pricing Perspective 55, 55 (Ian Yeoman & Una McMahon-Beattie, eds., 2011) (noting

that “price discrimination which is implicit in Revenue Management systems may undermine

trust in an organization, when buyers perceive that they have been treated less fairly than other

buyers”); Ellen Garbarino & Sarah Maxwell, Consumer Response to Norm-Breaking Pricing Events

in E-Commerce,63J. Bus. Res. 1066 (2010) (treating price discrimination as a norm-breaking

business practice).

5Babette E.L. Boliek, FCC Regulation Versus Antitrust: How Net Neutrality Is Defining the Boundaries,

52 B.C. L. Rev. 1627, 1678 (2011) (noting that the term “‘discrimination’ has a negative popular

association”) (footnotes omitted). In his book on pricing, Robert Phillips chooses to use the

term “price differentiation” to avoid the negative connotations of “discrimination.” Phillips,

supra note 1, at 74.

6See infra notes 92–97.

7See Amy Kapczynski, The Cost of Price: Why and How to Get Beyond Intellectual Property Internalism,59

UCLA L. Rev. 970, 1016 (2012); Douglas M. Kochelek, Data Mining and Antitrust,22Harv. J.L.

&Tech.515, 515 (2009); Lior Jacob Strahilevitz, Reputation Nation: Law in an Era of Ubiquitous

Personal Information,102Nw.U.L.Rev. 1667, 1732–33 (2008); Jonathan Zittrain, Privacy 2.0,

2008 U. Chi. Legal F. 65, 71.

8See Garbarino & Maxwell, supra note 4, at 1066–67; Kalyan T. Talluri & Garrett J. van

Ryzin, The Theory and Practice of Revenue Management 614–16 (2005).

9Some consumers were offered discounts between 20 percent and 40 percent on select DVDs.

Talluri & Van Ryzin, supra note 8, at 615.

2014 / Teaching Consumer Price Discrimination 293

had collected on its customers. Faced with a “huge public outcry,”10 Ama-

zon.com retreated from its differential pricing practices,11 claiming that the

price variations were due merely to a “random price test.”12 The company

gave refunds to consumers whose prices were affected by the firm’s differen-

tial pricing13 and issued a somewhat apologetic press release that referred to

the price test as a mistake.14

10Ronald Leenes, Do They Know Me? Deconstructing Identifiability,4U. Ottawa L. & Tech. J. 135,

146 n. 36 (2007). A “huge public outcry” may be a bit of an overstatement, but it certainly

created significant buzz in the relatively new world of e-commerce. See Kochelek, supra note

7, at 515 (stating that the incident precipitated a “public outcry”); Robert M. Weiss & Ajay K.

Mehrotra, Online Dynamic Pricing: Efficiency, Equity and the Future of E-Commerce, 6Va.J.L.&Tech.

11, ¶ 1 (2001), available at http://www.vjolt.net/vol6/issue2/v6i2-a11-Weiss.html (claiming that

the Amazon.com customers were “startled and quite upset when they learned that the online

mega-store was charging different customers different prices for the same DVD movies”).

11Mark MacCarthy, New Directions in Privacy: Disclosure, Unfairness and Externalities,6I/S: J. L.

& Pol’y for Info. Soc’y 425, 465 (2011) (“Consumer reaction to Amazon’s attempt to use

information about repeat customers to charge them a higher price, thereby punishing loyalty,

was so uniformly negative that the practice was abandoned.”); See also Christopher Paul Boam,

The Internet, Information and the Culture of Regulatory Change: A Modern Renaissance,9Commlaw

Conspectus 175, 80 (2001) (noting that Amazon.com “backtracked after unintended exposure

and consumer furor”).

12See News Release, Amazon.com, Amazon.com Issues Statement Regarding Random Price Test-

ing (Sept. 27, 2000), available at http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-

newsArticle_Print&ID=502821&highlight=.

13Id.

14The full news release reads as follows:

Some news reports over the last several weeks have incorrectly characterized a recent

Amazon.com random price test as a test based on customer demographic information.

These reports were incorrect and were not based on the facts.

Contrary to these reports, Amazon.com varied the discount levels on a totally random

basis, not with respect to customer demographic information. The purpose of the test

was to determine how much sales are affected by lower prices. In retrospect, this random

testing was a mistake, and we regret it because it created uncertainty and complexity for our

customers, and our job is to simplify shopping for customers. That is why, more than two

weeks ago, in response to customer feedback, we changed our policy to protect customers

should we ever do random price testing again (and currently we have no plans to do so).

Now, if we ever do such a test again, we’ll automatically give customers who purchased a

test item the lowest test price for that item at the conclusion of the test period—thereby

ensuring that all customers pay the lowest available price. Under this new policy, by Sept. 14,

we had refunded to 6,896 customers an average of $3.10 as a result of the DVD random price

test. “We’ve never tested and we never will test prices based on customer demographics,”