Legal & Ethical Considerations in Pricing Flashcards

A company operating in multiple countries implements 'transfer pricing' between subsidiaries primarily to minimize tax liabilities. The key legal concern regulators focus on is whether:

Answer: Prices reflect arm's-length transactions as required by tax authorities

Tax authorities require transfer prices between related entities to reflect arm's-length pricing (what unrelated parties would pay) to prevent profit shifting and tax avoidance.

Which of the following is NOT a recognized legal defense under the Robinson-Patman Act for charging different prices to competing customers?

Answer: Market share defense

The three recognized defenses under Robinson-Patman are cost justification, meeting competition in good faith, and changing conditions — market share is not a defense.

An airline's algorithm automatically raises ticket prices when it detects a user has searched the same route multiple times. The primary ethical concern with this practice is:

Answer: It exploits consumer search behavior to extract higher prices without the customer's knowledge

Using behavioral tracking to charge more to consumers who appear desperate or committed raises significant ethical concerns about transparency and consumer exploitation.

In pricing ethics, 'value-based pricing' raises ethical questions when:

Answer: The company captures value from customers without providing commensurate benefits

Value-based pricing becomes ethically problematic when firms exploit information asymmetry or captive customers to charge for value that isn't genuinely delivered.

A company's sales team systematically offers lower prices to male-owned businesses than identical female-owned businesses. Under US law, this most likely violates:

Answer: Federal and/or state laws prohibiting sex-based discrimination in commercial transactions

Gender-based price discrimination in commercial transactions may violate the Equal Credit Opportunity Act, state civil rights laws, and potentially the FTC Act as an unfair practice.

The practice of 'drip pricing' — where a low base price is advertised but mandatory fees are added during checkout — is primarily regulated as:

Answer: Deceptive advertising and unfair trade practice

Drip pricing is targeted by the FTC and state attorneys general as a deceptive practice because the total price is obscured from consumers during the initial purchase decision.

Which statement best describes the ethical obligation of pricing professionals when they discover their company's pricing practice is technically legal but causes significant consumer harm?

Answer: They should evaluate the practice against ethical standards and advocate for changes if warranted

Professional pricing ethics requires going beyond mere legal compliance to consider fairness, consumer welfare, and long-term trust — and advocating internally when practices are harmful.