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 often, it 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 by 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 the difference in costs is 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:
Price discrimination may be of various types. It may either be:
(1) Personal (2) trade discrimination (3) local discrimination.
(1) Personal discrimination. It is personal, when separate price is charged from each buyer according to the intensity of his desire or according to the size of his pocket.
For example, 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 or Levels:
There are three main degrees or levels 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 theatres, railways, typically charge lower prices to senior citizens, students etc.
Characteristics or Features or Conditions:
Price discrimination can only be possible if the following three essential conditions or features 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 example, a rich patient cannot send as poor man to the doctor for his medical check 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 example, 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 example, 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.