SESSION 24 RA (DEEPTI AHUJA)

WHAT IS PRICE DISCRIMINATION ? EQUILIBRIUM OF A DISCRIMINATING MONOPOLIST TYPES OF DISCRIMINATION PRICE DISCRIMINATION AND THE EXISTENCE OF THE INDUSTRY MONOPSONY BILATERAL MONOPOLY

Price discrimination exists when the same product is sold at different prices to different buyers . The product is basically the same , produced at the same cost , which is sold at different prices depending on the preference of the buyers , their income , their location.

The market must be divided into sub markets with different price elasticities There must be effective separation of the sub markets so that no reselling can take place from a low price market to a high price market

DISCRIMINATION OWING TO CONSUMERS PECULARITIES DISCRIMINATION OWING TO NAYURE OF THE PRODUCT DISCRIMINATION OWING TO THE DISTANCE AND FRONTIER BARRIERS

Condition of profitable price discrimination is MR1 = MR2=MC The total cost function of monopolist is same MC Price discrimination can be carried on profitably only if elasticities are different in two markets MR in each market must be changing less rapidly than MC for a output as a whole

P MR AR P1 p2

AR MR

MR MC MC

P*

MR1 AR1

MR2

AR2

qi

Q1

q2

Q2

P AR MR

MC

p1 p2 E1 MR1 0 q1 q2 AR1 Q E AR2=MR2

FIRST DEGREE DISCRIMINATION extreme form of discrimination and is known as perfect discrimination.
P p1 p2 p3 p HERE MC IS ASSUMED TO BE CONSTANT

MC =AC DD

0 q1 q2 q3

Imperfect form of discrimination Instead of setting different prices it involves pricing based on the quantities of output purchased by individual consumers
p
p1 p2 p3

q1

q2

Most common form of price discrimination Involves separating consumers or markets in terms of their price elasticity of demand Discrimination can be based on the nature of use Market can be segmented based on personal characteristics of consumers Often occurs in the markets that are geographically separated

p p2

p1

D1 0 MR1 q1 q q2

MR2

D2 q Q

MR

D q

 Doctors often charge rich patients more than poor patients Movies in the evening cost more than those in the early afternoon Senior citizen, youth, and student discounts New and used cars Youth fairs on airlines Evening meals in restaurants often cost more than the same meal at lunch
They may have one price for those with insurance and another price for those without insurance

C P D1 p1

D2

p2

LAC

q1

q2

Consist of a single seller and single buyer Equilibrium will not be determined by traditional tools of demand and supply Economic analysis can only define the range within which price will eventually be settled Precise level of price and quantity will be defined by non economic factors like bargaining power , skill and other strategies of firm Under such conditions analysis lead to indeterminacy

p c e2 p1 P

ME MC

PRICE WILL BE SET WITHIN THE RANGE FROM p1-p2

b e1

p2

DD Q MR

q2

q1