Monopoly Price Discrimination:
is Price Discrimination?
Definition of Price Discrimination:
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:
discrimination is the act of selling the same article produced under single
control at a different prices to the different buyers".
of Price Discrimination:
discrimination may be of various types. It may either be (i) personal (ii) trade
discrimination (iii) local discrimination.
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
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.
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.
Place discrimination. It occurs when a monopolist charges different prices
for the same commodity at different places. This type of discrimination is
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
Degrees of Price Discrimination:
three main degrees of price discrimination: (1) First degree price
discrimination, (2) Second degree price discrimination and (3) Third degree
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.
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.
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:
discrimination can only be possible if the following three essential conditions
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.
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
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.
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.