CPP - Certified Pricing Professional Legal and Ethical Constraints Questions and Answers 1 — Questions and Answers
Question 1: Two major home improvement retailers secretly agree to set a minimum price for all power drills they sell, effectively ending competitive pricing on these items. Which specific illegal pricing practice does this scenario describe?
- Price discrimination
- Predatory pricing
- Horizontal price fixing (Correct answer)
- Price gouging
Correct answer: Horizontal price fixing
Horizontal price fixing occurs when two or more competitors conspire to set prices, price levels, or price-related terms for their goods or services. This is a per se violation of the Sherman Antitrust Act.
Question 2: A large national distributor of office supplies offers a 20% discount to a major corporate chain but only a 5% discount to a small, independently owned store for the same bulk order of paper. Assuming the cost to serve both customers is identical, this practice may be illegal under which U.S. federal law?
- The Sherman Act
- The Robinson-Patman Act (Correct answer)
- The Clayton Act
- The Federal Trade Commission Act
Correct answer: The Robinson-Patman Act
The Robinson-Patman Act specifically prohibits anticompetitive price discrimination, which involves a seller charging competing buyers different prices for the same commodity where the effect may be to lessen competition.
Question 3: In the wake of a declared state of emergency due to a hurricane, a local hardware store increases the price of portable generators from $400 to $1,500. This practice is most likely an example of what?
- Price skimming
- Penetration pricing
- Value-based pricing
- Price gouging (Correct answer)
Correct answer: Price gouging
Price gouging is the practice of charging an exorbitant or unfairly high price for essential goods and services during a time of emergency or disaster. Many states have specific statutes that make this practice illegal.
Question 4: A dominant technology company with significant market share prices its new web browser software at $0, incurring substantial losses. Evidence suggests the company's goal is to drive smaller, competing browser companies out of business, after which it plans to monetize the user base through other means. This strategy could be legally challenged as:
- Predatory pricing (Correct answer)
- Collusive pricing
- Price lining
- Deceptive pricing
Correct answer: Predatory pricing
Predatory pricing is the anticompetitive strategy of setting prices at a very low level, often below production cost, to eliminate competition. Once competitors are driven from the market, the firm can raise prices to monopoly levels.
Question 5: Which of the following is a core principle of ethical pricing that emphasizes being open and clear with customers about the costs and components that make up a final price?
- Price maximization
- Competitive parity
- Price transparency (Correct answer)
- Cost-plus pricing
Correct answer: Price transparency
Price transparency is a key ethical principle that involves making pricing information readily available and easy to understand for consumers. It builds trust and allows customers to make informed decisions.
Question 6: A B2B software provider wants to offer a discount to a large potential client to win their business. To comply with the Robinson-Patman Act, which of the following justifications would be a valid legal defense for this price difference compared to other clients?
- The large client has more brand recognition.
- The sales team has a better relationship with the large client.
- The large client is based in a more desirable geographic location.
- The discount reflects cost savings from a simplified delivery and service process for that client. (Correct answer)
Correct answer: The discount reflects cost savings from a simplified delivery and service process for that client.
The Robinson-Patman Act allows for price differentials if they are justified by differences in the cost of manufacture, sale, or delivery. This is known as the "cost justification" defense.
CPP - Certified Pricing Professional Legal and Ethical Constraints Questions and Answers 1
Two major home improvement retailers secretly agree to set a minimum price for all power drills they sell, effectively ending competitive pricing on these items.
Which specific illegal pricing practice does this scenario describe?