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Pricing: Legal & Ethical Issues

Instructor: Elisha Madison

Elisha is a writer, editor, and aspiring novelist. She has a Master's degree in Ancient Celtic History & Mythology and another Masters in Museum Studies.

Pricing strategies for companies are constantly questioned, but are they legal or ethical? Usually, there are two sides to each strategy, the ethical, and unethical; however, unethical does not always mean illegal.

Marketing Strategy

A primary function of a marketing strategy is pricing. This amount is what determines profit margins and interest from consumers. Pricing can be the component that makes a business thrive, or it can be what causes bankruptcy. So, how do you price your products so that you follow the legal requirements and ethical guidelines, while still making a profit? Carefully.

Different Pricing Strategies

There is a plethora of pricing strategies, depending on the product being sold, or even the consumer it is being sold to.

  • Penetration/Market Pricing- This pricing strategy involves either a new business or new product. Businesses will bring out the product at a lower price than they would normally sell it for to gain customers. Once they have a solid customer base, they will slowly raise the rates on the product until it is profitable for the company. This is done because most consumers who are using a specific service or good are likely to stay, even with the price hike, because it is familiar. For example: If you go apartment hunting, there are times the leasing company will offer the apartment at $100 less than the normal rent price. This gets you excited and encourages you to move into the apartment. However, then they will continually raise rent each new lease signed, and because you don't want to move, they get their money back.

Legal or Ethical? - This is not an illegal pricing strategy, unless it falls into predatory or undercutting pricing issues. Undercutting is where a company is constantly setting prices below competitors to ensure they get sales and their competition does not. Laws prevent companies from using this tactic.

  • Monopolizing- This follows the above pricing strategy to the extreme. This is where a business will undercut their competitors so severely that they go out of business, allowing for the company to have a monopoly on the market. For example, if a cell phone company put all the other cell phone companies out of business, this would be a monopoly.

Legal or Ethical? - This is completely illegal, and the Federal Trade Commission came up with the Sherman Antitrust Act to stop this from happening.

  • Dumping - This pricing strategy is unique to the import and export of goods internationally. If a corporation is trying to sell widgets in the states for $10, but then they sell them in mass quantities overseas for $4, this is called dumping.

Legal or Ethical? - Whether it is legal or ethical depends on frequency and country. If a company does this infrequently, then it is highly unlikely to be an issue, but if it is a regular process, then the company could be fined or taxed. Certain countries will actually charge extra fees called tariffs to companies participating in this strategy.

  • Price Discrimination- Price discrimination is a large heading for many pricing strategies. One of them being bundle pricing, which charges less to consumers if they purchase more than one product, like warehouse stores, or 2 for 1 deals on cell phones. However, price discrimination also covers companies charging more money for their products in more expensive areas. For example, a burger chain in Chicago might charge $3 for a burger, whereas one in a small town in Kansas would be $2.

Legal or Ethical?- For these examples, it is completely legal, although frustrating to consumers. The only price discrimination that would be illegal is if the prices are changed due to any of the protected statuses like race or religion; raising or lowering prices for people of protected statuses are both illegal. A good example of this is the pink tax which is where some car mechanics will charge more to women who are do not know what repairs they are agreeing to.

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