A short primer on the economics of conditional pricing practices

Recently, the Bureau of Economics published "Conditional Pricing Practices -- A Short Primer" as part of its Economic Issues series. Written by Patrick DeGraba, Patrick Greenlee, and Daniel O’Brien—three economists who participated in the FTC/DOJ 2014 conditional pricing practices workshop—the primer surveys the theoretical economic literature on conditional pricing practices, focusing on how different CPPs can induce similar strategic responses from customers and rivals and have similar effects on competition despite taking different forms.

According to the authors, CPPs are “pricing strategies in which a seller conditions its prices on factors such as volume, the set of products purchased, or the buyer’s share of purchases from the seller.” In other words, a pricing practice is a “conditional pricing practice” if price is conditioned on quantities or shares. Examples include bundled discounts, quantity discounts, and market share discounts. In Figure 1 of the primer, the authors provide a taxonomy of these and other CPPs based on whether the practice involves one or more products, and whether the seller conditions price only on the buyer’s purchases of its product(s) or on the buyer’s purchase of rivals’ products as well.

According to the authors, the literature on conditional pricing practices has tended to study the different practices in isolation. In their survey, however, the authors found that different CPPs can be economically related, having similar welfare-enhancing or competition-reducing effects relative to uniform pricing. They explain that the literature identifies at least four non-mutually exclusive rationales for engaging in conditional pricing practices, including: promoting cost savings and investment; aiding in price discrimination; excluding actual or potential rivals to leverage or maintain a monopoly; and softening competition.

“Conditional Pricing Practices – A Short Primer” provides a unifying overview of the theoretical literature on conditional pricing practices. As such, it is worth a read for anyone interested in this dynamic and evolving area of antitrust.