Letter to Indiana Legislators Explain Why a Proposed House Bill is Anti-Consumer

Members of the Indiana House Committee on Commerce, Small Business and Economic Development:

As a non-partisan educational and research institute with the mission to promote consumer welfare, the American Consumer Institute (ACI) shares your goals of promoting competition in a free market. However, we are very concerned that passing HB 1109 (Wholesale Pricing of Nonalcoholic Beverages) would achieve the exact opposite, and instead harm competition and negatively impact consumers. The bill would specifically prohibit economic price discrimination by making it an “unconscionable act under the deceptive consumer sales law.”

Economic price discrimination refers to a method of market segmentation and is one of the most important means by which consumer benefits (economic welfare) are maximized. As I discuss below, the passage of this bill will lead to a number of disastrous consequences and it would harm consumer welfare.

Price discrimination allows firms to price below average costs to some buyers depending on market segmentation, elasticity, volume, and other factors. Without price discrimination, wholesalers would have to recoup their total costs by charging a price that contributes equally to fixed costs. As expected, over the long term all firms must cover both fixed and variable costs. Hence, eliminating price discrimination means that no business would receive a price below average costs – and essentially, consumers would pay more.

Higher prices would also lead to demand repression, which will impact employment and investment in Indiana. Of course, businesses and consumers in neighboring states could take advantage of the disparity between state prices and undercut commerce in the state. In addition, the bill would require the wholesaler to fix prices and publicly post these prices each month. These provisions encourage price collusion and would lead to higher wholesale prices and restricted output, since all sellers would know each other’s prices.

Professor Larry Darby, who cofounded ACI and who was raised and educated in Indiana, wrote:

“…price discrimination is common throughout American industry; does not require monopoly power; is widely supported by welfare economics and analysis; is necessary for efficiency and welfare maximization in most settings; and, overall, improves consumer economic welfare.”

Economic price discrimination is the means by which consumer welfare is maximized, according to the economic literature. Professor Darby’s thoughts on the importance of price discrimination is widely accepted in the economic literature:

  • “Price discrimination among buyers…is …routine even in highly competitive markets, including hotels, computers, automobiles, books, clothing, groceries, restaurants, telecommunications, and the vast range of other products that offer coupons, rebates, student or senior discounts, quantity discounts, or different prices at different times or places.  Indeed, it is hard to think of industries without price discrimination…” (Einer Elhauge, “Why Above-Cost Price Cuts to Drive Out Entrants Are Not Predatory—and the Implications for Defining Costs and Market Power,” Yale Law Journal, v. 12, 2003, at 733.)
  • “Price discrimination is one of the most prevalent forms of marketing practice.” (Hal Varian, “Price Discrimination,” Handbook of Industrial Organization, v. 1, (R. Schmalansee and R. Willig eds.) North Holland, 1989, at 598.)
  • “…pricing structures designed to accomplish segmentation [among users and uses] are widely used…in the economy.”  (Michael Levine, “Price Discrimination without Market Power,” Yale Journal on Regulation, 2001, at 2.)
  • “Indeed, it is hard to think of industries without price discrimination… even though most…are highly competitive or contestable, and the firms in them earn zero economic profit.” (William Baumol, Regulation Misled by Misread Economic Theory, 2006, at 1.)

To be clear: there is no empirical evidence or well accepted theory in economics or the financial literature that would support the elimination or restriction of economic price discrimination. Without price discrimination, consumers would pay the same as business travelers on flights, and senior citizens would pay more to stay at hotels and buy movie tickets. In this case, the only beneficiary of this legislation would be special interest groups looking to profit from the legislation, at the cost of effective competition and at a loss to consumers in the state.

Indiana should prioritize free market policies that enhance consumer welfare, rather than move in the opposite direction of price fixing and government controls. Price discrimination is key to market competition, business efficiency and scale, and it makes the purchase of everyday goods most affordable to consumers. In short, this bill does not fix a market failure; if passed, it will only represent a government failure and, regrettably, a handout to some special interest groups.

Respectfully,

Steve Pociask

President / CEO

American Consumer Institute

1701 Pennsylvania Avenue, NW, Suite 200

Washington DC, 20006

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