On the economics of the meeting competition defense under the Robinson-Patman Act

In this paper we analyze the welfare effects of third-degree price discrimination when competitive pressure varies across markets. In particular, we study the economic aspects of the Robinson-Patman Act associated with the “meeting competition defense.” We find that the “meeting competition” defense makes little economic sense under primary line injury. Using standard stylized models with linear demands and symmetric marginal costs, we are able to show, both for the final goods market and the intermediate goods market, that third-degree price discrimination which implies a lower price in the market with the higher competitive pressure is welfare worsening. These settings are precisely those in which the discriminating firm might invoke that its low price was set in Good Faith to meet an equally low price of a competitor. The results are robust to different types of competition (price or quantity competition) and different types of market (final or intermediate). We also find that under secondary line injury in the intermediate goods market results may drastically change. When the multimarket upstream firm discriminates in favor of the buyer in the more competitive market, social welfare increases and, therefore, the “meeting competition” defense goes in the right direction.

Further, this research also highlights the necessity of using equilibrium models to analyze the economic effects of the Robinson-Patman Act. In particular we show that price discrimination reduces social welfare quite generally in primary line injury contexts (both for final and intermediate goods markets) giving therefore support to the prohibition of price discrimination by the Robinson-Patman Act (but not to the meeting competition defense). At the same time, we also show that in secondary line injury contexts price discrimination tends to increase social welfare. As a consequence, the legislation on price discrimination should treat discriminatorily both price discrimination types.