Monopoly Price Discrimination

By Mrs. N. Jayaprada

Price Discrimination
Under certain conditions, a firm with market power is able to charge different customers different prices. This is called price discrimination.

The Price-Discriminating Monopolist

Price discrimination is the ability to charge different prices to different individuals or groups of individuals.

The Price-Discriminating Monopolist

In order to price discriminate, a monopolist must be able to:

Difference in price elasticity: Marker segmentation: Limit their ability to resell its product between groups. Legal approval if needed Location of the two markets Knowledge and awareness of discrimination.

The Price-Discriminating Monopolist

A price-discriminating monopolist can increase both output and profit.

He can charge customers with more inelastic demands a higher price. He can charge customers with more elastic demands a lower price.

Necessary Conditions for Price Discrimination

The firm must be able to segment the market Bases:

Geographical location Size of purchase order Purchasing power Time of purchases Social and professional status of buyers Age of customers

Types of Price Discrimination

First-degree: Each output unit is sold at a different price. Prices may differ across buyers. 2nd-degree: The price paid by a buyer can vary with the quantity demanded by the buyer. But all customers face the same price schedule. E.g. bulk-buying discounts.

Types of Price Discrimination

3rd-degree: Price paid by buyers in a given group is the same for all units purchased. But price may differ across buyer groups. E.g., senior citizen and student discounts vs. no discounts for middleaged persons.

Objectives
Maximisation of revenue High inventory accumulations To penetrate a new market Unutilised capacity Power of monopoly benefits Capture the market and Stable demand for the product

Third-degree Price Discrimination

Market 1 p1(y1)
p1 MC
AR

Market 2
p2

p2(y2)

MC
AR

y1 MR1

y2 MR2

The Early Bird Gets a Lower Price

Early Bird Specials Restaurants charge special, lower prices for early diners. MatineesTheaters charge less for earlier shows. Air FaresAirlines charge less for flyers willing to fly off peak, i.e. early morning and late night.

Perfect Price Discrimination

By discriminating, a monopoly firm makes greater profits than it would make by charging both groups the same price. A firm with market power could collect the entire consumer surplus if it could charge each customer exactly the price that that customer was willing and able to pay. This is called perfect price discrimination.

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