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Price Discrimination

24 Jul

Price Discrimination

      In all previous articles I assumed that monopolists charge a single price to all buyers. But under some conditions monopolists can increase their revenues by charging different prices to different demanders.  By doing this kind of act monopolist is engaging in price discrimination, the practice of selling of the same product to different buyers when the price difference aren’t justified by difference in cost.
   In order to engage in price discrimination there are some conditions that must be realized:

  • Market segregation– the seller should be able to differentiate the buyers into different classes, each of them having different wants and abilities to pay for the product.  This division of buyers is usually related to different elasticities of demand.
  • Monopoly power– another important characteristic is that seller should be a monopolist or at least to possess some monopoly power, so that he may control the quantity output and the price.
  • No resale-The original buyer mustn’t be able to resell the good or service. Otherwise, if the buyer from low-price segment is able to sell the goods purchased to buyers from high-price segment, then our seller will have some competition in high-price segment. This competition will reduce the price and will cancel seller’s price discrimination policy.

Examples of Price Discrimination
   Some movie theatre or golf clubs differentiate their charge on the basis of time ( lower rates in the night and higher rates in the evening) and age(younger- lower ability to pay, so less money is charged).  Another example can serve railroads where shipper of 1 tone of jewelry is charge more than a shipper of 1 tone of tomatoes.

Consequences of price discrimination
   Monopolist can increase its revenue by practicing price discrimination. At the same time, perfect price discrimination results in an increase of output. In this case each consumer pays the price that he or she is willing rather than to forgo the product.
   Other things equal, the monopolist that practices perfect price discrimination is producing a higher quantity of output than the monopolist that isn’t practicing it. When the non-discriminating monopolist lowers its price to sell additional unit, this lower price is applied not only to additional output but also to the prior units. So the non-discriminating monopolist’s marginal revenue falls more rapidly than the price and, marginal revenue, graphically, lies below demand curve. However when a discriminating monopolist lowers its price, this reduced price is applied only to additional units sold not to prior units. Thus marginal revenue equals price for each unit of output, graphically MR and Demand curve coincide.
   Although price discrimination results in more economic profit than that achieved by single price monopolist, it also results in greater output, so less allocative inefficiency.

Price Discrimination

Price Discrimination

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