THE GARGANTUAN.COM CASE STUDY

THE GARGANTUAN.COM CASE STUDY
A. Background Facts
Gargantuan, Inc. is one of the world’s largest online retailers of digital media including software, music, games, and other downloadable media, through its popular website gargantuan.com. Gargantuan’s main rivals are Amazon.com, the Google Play Store and Apple’s I-Tunes store. Gargantuan is about to start selling applications (“apps”) for use on “smartphones” like the Droid and the IPhone. Gargantuan was incorporated in 2002 in Delaware and the company went public in 2005. Karl Concorde is the Chief Executive Officer and President of Gargantuan. The firm’s Chief Information Officer is Jerry Grub.
Dynamic Pricing Services, LLC (“DPS”) is a consulting firm that offers integrated software and hardware solutions to assist firms with pricing their goods or services. DPS’s software and business methods are protected by a variety of patents. Aspects of DPS’s business that are not protectable under federal patent laws are considered to be trade secrets under state law. Firms who engage DPS are granted use of DPS’s software and access to some of its trade secrets for a period of time specified by contract. As part of the arrangement, clients sign a tough non-disclosure agreement that forbids the client from divulging information about DPS’s software, hardware and consulting advice to third parties—even after the end of the contract. Firms who engage DPS agree that DPS can use their names in limited advertising materials. For example, the DPS website lists clients that have used DPS’s services.
B. The Meeting
Concorde, the Gargantuan CEO, and Grub, the Gargantuan CIO, met with a sales team from DPS, led by Larry Chen and Dan Dale, to learn more about their products. An abridged transcript of the meeting follows here.
Chen: “DPS’s software will give Gargantuan a menu of powerful options when it comes to pricing online media. Let’s assume that you are trying to sell apps that consumers can directly download and you are trying to set the price for the apps. One possibility is that you could charge 99 cents for each app no matter what.”
Grub: “Yeah, that’s sort of what we were planning—a fixed price for each app.”
Chen: “But let’s say that there is a group of buyers out there that would be willing to pay $1.29 for a certain app. That’s 30 cents more in your pockets. We can figure out that this demand exists.”
Grub: “Sure, but if we price the apps at $1.29, we might lose those consumers who are not going over a buck an app.”
Chen: “That is the power of the system—using a variety of methods we can target those consumers who would be willing to pay $1.29 per app and your website will offer the app to them at $1.29. On the other hand, the consumers who probably would not pay more than a dollar will get the $.99 price for that app.”
Grub: “So we would be selling the same app to different people at different prices?”
Concorde: “I suppose it makes sense. We offer discounts to loyal customers by sending them coupon codes by email.”
Chen: “Actually, you might find it interesting to learn that sometimes it pays to offer the higher prices to your most loyal customers.”
Concorde: “How so?”
Chen: “Well, your loyal customers may have already demonstrated through prior purchases and demographic data that you have on them that they will pay slightly higher prices. On the other hand, new customers might need a lower price as an incentive to buy with you. So, your best customers might pay $1.29 an app, and you could charge 79 cents to new customers as a way of hooking them in.”
Concorde: “We still haven’t discussed the most important issue. How, exactly, are you going to figure out which consumers will pay the higher prices?”
Chen: “Dale can explain that best.”
Dale: “Prices are determined by our confidential, patented software. In general terms, there are three basic sources of information. First, we collect and analyze massive quantities of demographic, economic and spending data from government agencies, private polling sources and marketing firms to paint a picture of how much different people will spend online for various goods and services.”
Chen: “Based on a consumer’s zip code alone you would be surprised at how much we can learn about what someone will pay for a pair of socks.”
Dale: Second, we can collect data from consumers who peruse your website—even if they never make a purchase. This is important because we can see what people are looking at, even if they don’t buy, and even how long they look at certain products. Third, and most powerfully, we can draw on the shoppers’ past purchasing history with you and their personal demographic information to get a better sense of what they will pay for apps.”
Grub: “So each consumer gets a price tailored specifically to them?”
Chen: “Right. And then we can create an interface with your software so that different consumers actually visit a different virtual ‘store’.”
Concorde: “This sounds very promising. I am going to run it by the board of directors and we will get back to you quite soon.”
C. The Law
Preliminary research by an undergraduate summer intern has uncovered a federal statute, called the Robinson-Patman Act, which states in part:
It shall be unlawful for any person engaged in commerce. . . to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or resale within the United States . . . and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them: Provided, That nothing herein contained shall prevent differentials which make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered: . . . And provided further, That nothing herein contained shall prevent persons engaged in selling goods, wares, or merchandise in commerce from selecting their own customers in bona fide transactions and not in restraint of trade: And provided further, That nothing herein contained shall prevent price changes from time to time where in response to changing conditions affecting the market for or the marketability of the goods concerned, such as but not limited to actual or imminent deterioration of perishable goods, obsolescence of seasonal goods, distress sales under court process, or sales in good faith in discontinuance of business in the goods concerned.
No other legal research has been performed.
D. Discussion/Homework Questions
Question #1: Can you think of examples from everyday life where a single seller charges different prices to different consumers for the same good or service? Write a list of three examples.
Question #2: If DPS’s pricing plan works perfectly, why would this result in more profit for Gargantuan? Explain the basic economics in plain English.
Question #3. From a purely practical perspective, why doesn’t every business price discrimiate?
Question #4.Based only a close reading of the statutory language from the Robinson-Patman Act provided above do you think that the DPS’s plan would be legal? Be sure to highlight the specific parts of the statutory text (the law) that you think apply to this case. Outside research is not necessary.
Question #5. Assume DPS’s plan would be legal and effective. Do you think that consumers would find this differential pricing plan to be unfair, immoral or unethical? What do you think?