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Home Price and Output Determination Under Monopoly Monopoly Price Discrimination

 

Monopoly Price Discrimination: 

 

What is Price Discrimination?

 

Definition of Price Discrimination:

 

While discussing price determination under monopoly, it was assumed that a monopolist charges only one price for his product from all the customers in the market. But it often so happens that a monopolist, by virtue of his monopolistic position, may manage to sell the same commodity at different prices to different customers or in different markets. The practice on the part of the monopolist to sell the identical goods at the same time to different buyers at different prices when the price difference is not Justified by difference in costs in called price discrimination. In the words of Mrs. Joan Robinson:

 

"Price discrimination is the act of selling the same article produced under single control at a different prices to the different buyers".

                       

Types and Examples of Price Discrimination:

 

Price discrimination may be of various types. It may either be (i) personal (ii) trade discrimination (iii) local discrimination.

 

(1) Price discrimination. It is persona!, when separate price is charged from each buyer according to the intensity of his desire or according to the size of his pocket.

 

For instance, a doctor may charge $20000 from a rich person for an eye operation and $500 only from a poor man for the similar operation.

                         

(2) Trade discrimination. It may take place when a monopolist charges different prices according to the uses to which the commodity is put. For example, an electricity company may charge low rate for electric current used in an industrial concern than for the electricity used for the domestic purpose.

 

(3) Place discrimination. It occurs when a monopolist charges different prices for the same commodity at different places. This type of discrimination is called dumping.

 

In Economics, a monopolist sells the same commodity at a higher price in one market and at a lower price in the other. Dumping may be undertaken due to several reasons, (a) a monopolist may resort to dumping in order to dispose off the accumulated stock or (b) he may, dump the commodity with a desire to capture the foreign market, (c) dumping may also be done to drive the competitors out of the market, (d) the motive may also be to reap. the economies of large scale production, etc.    

 

Degrees of Price Discrimination:

               

There are three main degrees of price discrimination: (1) First degree price discrimination, (2) Second degree price discrimination and (3) Third degree price discrimination.

 

(1) First degree price discrimination. The monopolist charges a different price equal to the maximum amount for each unit of the commodity from each consumer separately. The price of each unit is equal to its demand price so that the consumer is unable to enjoy any consumer surplus. Such prices are charged by doctors, lawyers etc. In fact, the first degree price discrimination manifests itself in the form of as many prices as many consumers. 

         

(2) Second degree price discrimination. Here the monopolist divides his market into different groups of customers and charges each group the highest price which the marginal consumer belonging to that group is willing to pay. The railway, airlines etc., charge the fares from customers in this way.

 

(3) Third degree price discrimination. In the third degree price discrimination, the monopolist divides the entire market into a few sub-markets and charges different prices for the same commodity in different sub-markets. The division here is among classes of consumers and not among individual consumers. Third degree price discrimination is possible only if the classes of consumers can be kept separate. Secondly, the various groups of customers must have different elasticities of demand for his commodity. The segment with a less elastic demand pays a higher price than the segment with a more elastic demand. The consumer faces a single price in each category of consumers. He can purchase as much as desired at that price. It is the most common type of price discrimination. For example, movie theaters, railways, typically charge lower prices to senior citizens, students etc.

 

Conditions of Price Discrimination:

 

Price discrimination can only be possible if the following three essential conditions are fulfilled.

                                              .

(1) Segregation by price. There should be no possibility, of transferring a unit of commodity supplied from the low priced to the high priced market. For instance, a rich patient cannot send a poor man to the doctor for his medical cheek up at a cheaper rate for him. Similarly, if you want to send a kilogram of gold by train to a relative of yours, you cannot get it converted into coal or iron simply because these metals are transported at a cheaper rate.

                            

(2) Segregation by market. Another essential characteristic of price discrimination is that there should be no possibility of transferring one unit of demand from the high priced to the low priced market. For instance, a banana market is divided on the basis of wealth. The poor are supplied bananas at a concessional rate in one market. The rich people will not like to become poor in order to get the commodity at a cheaper rate. A monopolist will maximize his total revenue by equalizing marginal revenue from all the markets. For instance, if in a particular market, the marginal revenue of a commodity is $20 per quintal and in the other $15 per quintal, a monopolist will at once shift the supply of the commodity from the later to the former till the marginal revenue from both

the markets becomes equal.                        

 

(3) Segregation by demand. Price discrimination can be possible if there is difference in the elasticity of demand in different markets. If the demand for a certain commodity is elastic in a particular market, the monopolist will charge lower prices. But if the demand is inelastic, the monopolist will fix higher prices for his product.

 

Here, a question can be asked as to how far is a price discrimination beneficial to society. The answer is that if a monopolist charges low price for his product from the poor people and higher price from the rich, then certainly we can say that it increases economic welfare. But if a monopolist dumps his output in a foreign market at a low price and raises the price of his commodity in the home market, then such a price discrimination is certainly detrimental to society, if the production of certain commodity is subject to law of increasing returns, then price discrimination may be to the advantage of the society. The monopolist increases the sale of output in order to sell the commodities in the foreign market. The monopolist fixes a low price for his output both for the home market and the foreign market. It is from this point of view only that we say price discrimination is desirable and beneficial.

 

Relevant Articles:

 

What is Monopoly
Conditions/Base of Monopoly Power
Monopolist's Demand Curve
Short Run Equilibrium Price and Output Under Monopoly
Long Run Equilibrium Under Monopoly
Comparison Between Monopoly and Competitive Equilibrium or Perfect Competition
Misconceptions Concerning Monopoly Pricing
Monopoly Regulations
Monopoly Price Discrimination
Price and Output Determination Under Discrimination Monopoly
Assessment of Discriminating Monopoly or Price Discrimination
Dumping
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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