Price discrimination (discriminating monopoly) is said to occur when a monopolist charges more than one price for an identical product and these price difference is not justified by the cost difference. Is this price discrimination?
It is debatable whether; unchecked monopoly power, collusion and price fixing are beneficial for a society or harmful to an economy.
The main points which are in favor of or against of discriminating monopoly are discussed in brief as under:
Merits or Advantages:
(1) Need for strong companies to face global competition: The industries which require a great deal of capital need protection and support of the government to face global competition. If these companies are made larger and given more monopolistic power, they will be able to avail the economies of scale and face competition in the global market.
(2) Research and development: Schumpeter is of the view that it is only the monopolists or the oligopolists that can provide large sums of money for carrying out expensive research and development programmes. So the support for discriminating monopoly.
(3) Capital flow: It is also argued that investors are always looking for profitable ventures and mobilize huge sums of money to enter into the industry which is most profitable. The businesses which have monopoly can earn more profit and so to attract large capital.
(4) Redistribution of income: The case for monopoly is pleaded on the ground also that it brings a redistribution of income. The monopolists can earn huge profits and so they give bonuses, higher rewards, etc., to their workers. The wealth thus gets redistributed from the rich to the poor.
Demerits or Disadvantages:
(1) Dumping: A monopolist often tries to dump its surplus output on foreign markets, at below cost price. When a dumping company succeeds in driving out competitors, it then raises the price of its product. So the price discrimination that lessens competition is considered harmful and illegal.
(2) Allocative inefficiency: It is a fact that a monopolist produces goods at a price greater than marginal cost. It represents a misallocation of resources.
The government plays two basic roles which are contradictory, (i) it promotes competition and (ii) it restricts competition by regulating and protecting certain industries.
The government protects the natural monopolies by taking complete control over them. Sometimes they are operated through public private ownership. The most popular trend, of the 1980’s is the transfer of government business to the private sector. The basic logic behind privatization of businesses are that incentive to be efficient is greater when one’s own money is at risk. Those who oppose privatization argue that monopoly must be regulated as it is in the public interest.