Protection of Consumers against Price Discrimination
Table of Contents
Price discrimination refers to charging different prices from different customers for the same good or service to capture consumer surplus and maximize revenue. And if different prices are set for different buyers for a good reason, such as an effort by the seller to meet the competitor’s price and when there is no intent to harm competitors then it is not illegal price discrimination.
There are three degrees of Price Discrimination:
· First Degree: To this degree, it is assumed that the seller of the good know that at what maximum price every customer is ready to purchase the good. With the help of this theory, the sellers maximize their profit without deadweight loss. E.g. – If a seller sells a bag for ₹1000/- to a poor person and sells the same bag for ₹1500/- to a rich person, as he knows that the rich person can also buy that bag at the latter amount and the poor one can’t afford at the latter price.
· Second Degree: In this, the seller charges different prices from customers for the quantities they purchased, like quantity discounts on bulk purchases. E.g. - If a person buys 1 pair of trousers for ₹1000/- but another man buys the pack of the same 5 trousers for ₹4000.
· Third Degree: In this, the seller sells the same good or service at different prices to different buyers group. This degree of price discrimination is most common. E.g. – If a movie theatre or amusement park charges different prices for tickets from customers based on age i.e. children, adults, and seniors.
· Sometimes there is also a fourth degree of price discrimination and in this degree the prices to consumers are similar but the producer faces different costs. It is also called reverse price discrimination.
There are two other types of price discrimination as well i.e. direct price discrimination and indirect price discrimination. The former one is based upon the identity of the buyers and the latter one involves several offers and achieves price discrimination through buyer choices.
For a seller or producer to perform this price strategy, some conditions should be satisfied like:
· Imperfect Competition – There should be monopoly power of the seller for exercising price discrimination. As if the seller is working in a market with the perfect competition then this pricing strategy will not work as then he would be a price taker, not a price maker.
· Prevention of resale – This means that the buyers who purchased a product or service at a lower rate should not be able to resale it to other buyers who would have otherwise paid a higher price for the same product or service.
· The elasticity of demand – There should be less elasticity of demand because if the buyers all show a similar elasticity of demand, this price strategy will not work.
Apart from offline price discrimination, online price discrimination is also in trend as the online retailers or shops offers each website to customers at different price. It is also known as personalized pricing. Online shops can identify customers through cookies, search results, IP address etc., and can know which customer is price-sensitive and which is price-insensitive so that they can charge different prices from both. For example delivery charges, travelling tickets etc. can be different for different customers. As in 2000, it was seen that Amazon offered different buyers different prices, when a regular customer deleted his laptop’s cookies, he saw that the price of a DVD player dropped. Hence, it appeared that the buyers who previously ordered from Amazon were shown a higher price for a product as compared to the new buyers. Also, there is another example of 2012 which concerns office supplies sold by Staple.com. It was also seen that Staples charged different prices from different people in different areas based on their IP address, as it charged high prices from the people who lives in high-income areas.
Now the consumers under this Act are also able to file complaints online along with the fact that they won’t require a lawyer to present their cases.
Consumers also get benefits of 2 types of warranties (i.e., full warranty and limited warranty) on some products. A full warranty (FW) is a warranty in which the product is replaced or repaired during the specified warranty period and on the other hand limited warranty and (LW) is a warranty in which is limited to just the specified parts, certain types of defects, or other conditions. Additionally, FW does not often cover normal wear and tear but LW may cover. These warranties are further defined under analysis.
Price discrimination is usually legal but it becomes illegal if it’s done based on race, religion, nationality, or gender, or if it is in violation of price-fixing laws. Consumers are protected from it by various acts and some organisations also help consumers to be aware of the frauds in the market and safeguard consumers from exploitation. Price discrimination has been made illegal under the Sec 4 of the Indian Competition Act 2002, which stops businesses holding a dominant position in a relevant market from mistreating that position and the act also applies to all businesses, including public entities that are engaged in economic activities. Mistreatment of power can be directly or indirectly imposing high or unfair prices on the sale of products or services. And consumers are mainly protected under Consumer Protection Act (COPRA) 2019 as it protects consumers from various types of frauds by sellers and also provides some rights to them and the researcher had defined it in detail below.
Consumer Protection Act, 2019 is the most helpful weapon for protecting consumers against discrimination based on price as well as other factors like quality, quantity etc. It was passed by parliament in 1986 and it came into force from 1st July 1987 and it was also amended in 1993, 2003 and 2019. It has been presented as a significant act in the history of India and it is applicable in every state of India and extends to the whole of India. It covers all the goods and services available in India and also provides for the formation of Consumer Protection Councils both in the states and at the centre. These councils’ main aim is to protect the interest of the consumers and to safeguard them from any type of illegal practice (like charging high prices, adulteration, poor quality of goods and services, hoarding etc.) by the sellers. Both official and non-official members in these councils protect the rights of consumers (like the right to safety, information, choice, redressal etc.) presented in this Act and the nature of this Act is compensating for the loss. There’s a new concept under this act of Product liability which is defined as follows-
“A manufacturer or product service provider or product seller will now be responsible to compensate for injury or damage caused by defective products or deficiency in services.”
There is also three-tier Judicial Machinery or Redressal Agencies for redressing the grievances of the consumers under the Consumer Protection Act:
· District Forum- State government sets up these district forums and these forums hear the disputes of the consumers involving the sum up to ₹20 Lac.
· State Commission - It is also set up by the state government and each state has one state commission and these commissions hear the disputes of the consumers involving the sum exceeding ₹20 lac and up to ₹1Crore.
· National Commission- It is set up by the central government and it is the only one in India and these commissions hear the disputes of the consumers involving the sum exceeding ₹1Crore.
Also, Consumers Associations, state government, central government along with the consumers can file complaints against the seller, manufacturer, service provider etc. in these forums or commissions.
There are various journal articles, cases from subscribed databases etc. about the topic and the researcher had gone through various sources for appropriately understanding the topic.
1. “How companies can make more money by allowing you to pay as you want”[1]
The article by Adrian R. Camilleri speaks about the first degree of price discrimination as it tells there may be reasons for companies to accept a ‘pay as you want’ pricing system and it is mainly most effective in low competition markets. There are some the companies like rock band Radiohead who sell one of its albums online by this system i.e. pay what you want and there is also New York’s Metropolitan Museum of Art which also used this system or policy for 50 years and by this, they increased their revenues. Sometimes customers can pay lees at pay-as-you-want businesses but this helps in generating several customers and could drive competitors out of the market. So, in this system, many people get more satisfied with the products and they think it to be the best quality of product and pays more than the price of the product and helps the seller to maximize his revenue and stay in business as paying more is also a signal to others that we are fair.
2. “Abuse of dominance: Pricing Practices under Competition Act”[2]
This article by Mariya Paliwala discusses the topic of abusive pricing prohibited under “The Competition Act 2002” and further talks about how are the consumers protected from such abusive pricing techniques that some traders follow underlying the punishments given for such acts.
1. “Noida Software Technology Park vs. Star India Pvt. Ltd. & Others”[3]
In 2018, this case dealt with price discrimination, wherein the petitioner Noida Software Technology Park (NSTP) was charged a hefty amount of money in name of carriage fees and Placement fees whereas they charged a nominal amount of fees from their favoured distributor. In this case, the Petitioner was a public limited company who had been issued a license to main, operate and install digital cables in India who alleged companies - Star India Private Limited (Star India), Sony Pictures Network India Private Ltd. (Sony Pictures) and Indian Broadcasting Foundation (IBF) for engaging in unfair business tactics involving Price discrimination under Section 3(3), Section 4 of The Competition Act, 2002. It was alleged that the broadcasters made disparate payments in the form of carriage fees (to carry channels) and placement fees (to place channels at prominent positions) to their favoured position. Allegedly these fees were often greater than the license fee ordinarily charged to distributors that significantly reduced cost for such favoured distributors vis-a-vis others. While broadcasters made channels available on an a-la-carte basis, the terms at which they were offered, included pricing, made the choice. . Rendering the judgment to this case the court stated the price discrimination occurred in this case.
2. “Shri Shamsher Kataria v. Honda Siel Cars India Ltd & Ors.[4]
In 2014, The CCI (Competition Committee of India) considered the traveller vehicle market and the post-retail marketplaces involving spare parts, diagnostic tools and the provision of after-sale repair and maintenance benefits in Shri Shamsher Kataria v Honda Siel Cars India Ltd and Ors (2014) (Auto Parts case). It found that 14 vehicle companies had violated their dominant position in their respective business sectors by forcing customers to purchase spare parts.
3. “M/s Sai Wardha Power Company Ltd vs. M/s Coal India Limited and its subsidiaries”[5]
In the Coal India case (2014), the CCI found that Coal India, which had no competitor in the state for coal supplies as there is their monopoly, had imposed unfair terms and conditions for the supply of coal in its contracts. The COMPAT analysed this case in 2016 and then CCI again examined the case and imposed a fine and Coal India Ltd. and subsidiaries Mahanadi Coalfields, Western Coalfields and South Eastern Coalfields were found guilty at last of unfair trade practices.
The objective of the study is to:
1. Examine the behaviour of the shopkeeper towards different sections of consumers (i.e., poor, rich, urban, rural, educated, and uneducated).
2. Differentiate between two types of warranties (Full warranty and Limited warranty)
3. Know different acts for protecting consumers from price discrimination.
4. Identify the factors of price discrimination.
5. Understand the Consumer Protection Act, 2019
The study is confined to India only and the above data is collected from secondary sources or published sources like journals, research papers, and articles of some well know personalities etc.
The researcher in his research paper has many objectives which he tries to analyze:
Sellers exploits consumers based on different sections of consumers. As many sellers charges, high prices from rich people compare to poor because they know that rich personalities are in a position to pay the amount asked by them. Also, those sellers try to exploit consumers who are uneducated because uneducated consumers are mostly unaware of their rights while purchasing any product or service. And some seller also tries to exploit based on an area of living as if the consumer is from an urban area then they try to charge more price as compared to the price demanded from rural area people. So, like this, the sellers try to discriminate against consumers of different factors for increasing their revenue.
Full warranty: Any company/firm that promises a full warranty need to change the whole product if any faults come out in the specified warranty period but they won’t change the product under normal wear and tear of the product. It must only be active for a specific period of 60 days or 80 days etc. Some state laws mandate the company/firm to repair the products or replace them with a new one within the reach of the customer
Limited Warranty: As its name specifies limited warranty only replaces a certain part of the product purchased under certain types of defects or other conditions. It only means the product is replaced or repaired and not the labor cost wherein in full warranty it also covers in labor cost.
1. Consumer Protection Act, 2019
By the above-mentioned act an authority was finalised namely the “Central Consumer Protection Authority”, it’s somewhat familiar to the “Federal Trade Commission” established in the USA. Under Section 18, the authority can practice suo motto actions to investigate or inquire about violations of consumer rights or unfair trade practices under price discrimination.
2. Competition Act, 2002
Sec 4 of the Indian Competition Act 2002 prohibits businesses holding a dominant position in a relevant market for mistreating that position and the act also applies to all businesses, including public entities that are engaged in economic activities. Specifically, it states that an unfair purchase/selling price may constitute an abuse of dominance. Section 2(1) (c) talks about when a trader charges much more than the ordinary set off for a good conducts price discrimination
This act deals with the following two finds of interdictions –
· Action against an existing firm for price discrimination
· Actions against a firm for illegally stopping another firm from entering the market
Price discrimination occurs when –
· Existence of monopoly: According to this, a person can carry out price discrimination if there’s a degree of monopoly going on in the market.
· Agreements within traders: If a trader is a monopolist and enters into an agreement with another trader for charging a certain value of money from a certain community it gives rise to price discrimination.
· Geographical aspect: There might be possibilities wherein a certain product is charged quite less at a place but the same product is charged heftily at another place. The prices under such cases change due to various factors like transportation etc.
The Consumer Protection Act, 2019 brings in constructional and methodological reforms to the act of 1986. Further, it minimizes the deficiencies in the previous act. Additionally, it safeguards the customers by exploitation, intensifying the need for consumer law, especially for the regulation of e-commerce sites. So, the basic aim of this Act is to protect the rights of the consumers by initiating authorities to provide expedient and effectual administration.
For a long time now the consumers have been facing the issue of price discrimination. The research paper tried to solve this issue. While dealing with this issue a lot of things were discovered that aren't known to the people a large various rules, provisions and rights that the consumers possessed weren’t much talked upon. There still exists some loopholes which need to be covered which would further help the consumers from getting exploited and bearing suffering. It's important to understand what happens behind the customers, the different ways of price discrimination, the different factors of price discrimination, its preventions, and acts that protect the consumers from so. This research paper has tried to bring in as much in-depth knowledge as possible and thus would enable the reader to know a lot Consumer Protection Act, 2019 (COPRA) along with price discrimination and also talks about another way in which consumers can be protected from the unfair practices by sellers at the time of selling goods.
[1] Adrian R. Camilleri, How companies can make more money by allowing you to “pay as you want”, The Conversation, http://theconversation.com/how-companies-can-make-more-money-by-allowing-you-to-pay-as-you-want-92594 (last visited Oct 31, 2021). [2] Mariya Paliwala, Abuse of dominance: Pricing Practices Under Competition Act, iPleaders (2019), https://blog.ipleaders.in/abuse-of-dominance-pricing-practices/ (last visited Oct 31, 2021). [3] Noida Software Technology Park vs. Star India Pvt. Ltd., 2018 SCC OnLine CCI 65. [4] Shri Shamsher Kataria v. Honda Siel Cars India Ltd & Ors., [2014] CCI 26. [5] M/s Sai Wardha Power Company Ltd vs. M/s Coal India Ltd. [2014] CCI 144.
Sanket Dull
Content writer Legal insight