Managers need to make their pricing decisions on both cost and market factors. There are many legal and ethical issues that managers also need to consider. There are laws in place for pricing decisions. These laws protect consumers, but they also protect corporations from predatory pricing and discriminatory pricing. Predatory pricing is when companies set prices below average variable cost so that their competitors are driven out of the market. This will cause a monopoly where the seller controls the price. The other issue that managers need to consider is discriminatory pricing. This is when a company charges different prices to different customers for the same product. It is the ethical responsibility of management accountants to refrain from the illegal acts of predatory pricing or discriminatory pricing (Horngren, Sundem, Stratton, and Burgstahler, Schatzberg, 2008).
The United States Government has stepped in and created rules against the unethical issues of predatory pricing and discriminatory pricing. Two of these are The Robinson-Patman Act and The Sherman Antitrust Act of 1890. The Robinson-Patman is actually a supplement to the Clayton Antitrust Act. The Robinson-Patman act was originally created because chain stores were able to purchase goods at a lower cost than retailers. The act requires sellers to sell to everyone at the same price and requires buyers to buy from a particular seller at the same price as everyone else (Smith, 2004). The primary purpose of the Sherman Antitrust Act was to prohibit monopolies and keep competition going between companies. The Act protects companies from each other and also protects consumers from unfair business practices. The U.S. government uses the Federal Trade Commission to monitor several activities such as preventing monopolies, provide fair competition, to protect consumers, to put a stop to predatory and discriminatory pricing (Peritz, 2008).
An R&D manager stated the following, “It is impossible to use DCF methods for evaluating investments in research and development. There are no cost savings to measure, and we don’t even know what products might come out of our R&D activities.” This manager was asked to justify the investment in a major research project based on its expected net present value. I would not agree with this manager’s statement. Discounted cash flow (DCF), is a capital budgeting model that focuses on a project’s cash inflows and outflows while keeping in mind the estimated cost of the project (Horngren, Sundem, Stratton, and Burgstahler, Schatzberg, 2008). Although it may be difficult to determine, since there are many uncertainties and risks involved with research and development, it is not impossible to find the return of R&D using DCF. It is valuable to predict possible outcomes of R&D on the company’s cash flow. No company is going to research a project unless they believe there is some profit involved in the outcome. Therefore, companies have an expected outcome when they invest in R&D. We use that expectation to help determine a net value for the project.
Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D., Schatzberg, J., Introduction to Management Accounting (14th Edition) Pearson, Prentice Hall, Upper Saddle River, NJ.
Pietz, R. (2008, April). The Sherman Anti-Trust Act of 1890 A more dynamic and open American economic system. Historians on America. Retrieved December 5, 2008, from http://www.america.gov/st/educ-english/2008/April/20080423212813eaifas0.42149.html
Smith, T. (2004, June 23). Legality of Price Discrimination.The Wiglaf Journal. Retrieved December 5, 2008, from http://www.wiglafjournal.com / Articles/2004/2004-06-23-RobinsonPatman.htm