Price Discrimination and Monopoly

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MICROECONOMICS

MONOPOLY AND PRICE DISCRIMINATION




Learning Objectives
After reading this chapter, you are expected to learn about:







Introduction

Price discrimination refers to the practice of a seller of selling the same good at different prices to different buyers. A seller makes price discrimination between different buyers when it is both possible and profitable for him to do so. Price discrimination is not a very common phenomenon. It is very difficult to charge different prices for the identical good from different customers. Frequently, the product is slightly differentiated to successfully practice price discrimination.

In the words of Mrs. John Robinson “The act of selling the same article, produced under single control at different prices to different buyers is known as price discrimination”. Also Prof. Stigler defines Price discrimination as “the sales of technically similar products at prices which are not proportional to marginal cost” As per this definition, a seller is indulging in price discrimination when is charging different prices from different buyers for the different varieties of the same good if the differences in prices are not the same as or proportional to the differences in the cost of producing them. For Example, If the manufacturer of a mobile of a given variety sells at Rs. 10.000/- to one buyer and at Rs. 11,000/- to another buyer, (Specific Model) he is practicing price discrimination.

Price discrimination is not possible under perfect competition, even if the two markets could be kept separate. Since market demand in each market is perfectly elastic, every seller would try to sell in that market in which could get the highest price. Competition would make the price equal in both the markets. However, price discrimination is possible and profitable only when markets are imperfect.




TYPES OF PRICE DISCRIMINATION


Price discrimination is of various types. Some of them are as follows:

  1. Personal price discrimination: It may be personal based on the income of the customer. For example, Doctors and Lawyers charge different fees from different customers on the basis of their income. Higher fees are charged to rich persons and lower to the poor.
  2. Geographical or Local discrimination: There is geographical price discrimination when a monopolist sells in one market at a higher price than in the other market. For example, in a posh locality, a beauty parlor may be charging more while charging lower rate for the same service in a common locality.
  3. Discrimination on the basis of Nature of the Product: Different prices are charged when there is a difference in the quality of the product. For example, Unbranded products, like open tea, are sold at lower prices than branded tea like Brooke Bond or Tata tea.
  4. Discrimination on the basis of Age, Sex and Status: Here different prices are charged on the basis of age, sex and status of consumers. For example, railways fare for children and senior citizens are different, various states in India there is no fees for girls in schools and in case of Toll tax all MLAs, MPs and Ministers are exempted.
  5. Discrimination on the basis of Time: Different rates may be charged for a service depending upon time. For example, Telephone STD call rates at day time and night. Besides, advertising rates on TV based on prime time and non –prime time.
  6. Discrimination on the basis of Use of product / Service: Prices differ according to the use to which the product is utilized. For example, electricity per Unit rates are different for users as domestic use, Farm use and industrial use.


Degree of Price Discrimination


Prof A. C. Pigou has distinguished between the three degrees of price discrimination.

  1. Price discrimination of the First Degree
  2. Price discrimination of the Second Degree
  3. Price discrimination of the Third Degree.
  1. Price discrimination of the First Degree: Price discrimination of the first degree is also known as perfect price discrimination.
WHEN IS PRICE DISCRIMINATION POSSIBLE ?



EQUILIBRIUM UNDER PRICE DISCRIMINATION:



PRICE DISCRIMINATION IN CASE OF DUMPING:



Dumping is a special type of International price discrimination. Heberler defines dumping as: “The sale of goods abroad at a price which is lower than the selling price of the same goods at the same time and the same circumstances at home, taking account of differences in transport costs”.

Generally imposition of import tariffs and other restrictions on the inflow of foreign goods, create monopoly in the home market for the national industries, while they have to face competition in the foreign markets. The national industry, which enjoys monopoly of the home market, can fix a higher price for home consumers while disposing of the surplus produce in the competitive foreign markets at a lower price for the same good and seek to enjoy the advantages of the economies of scale. This type of price discrimination is called “Dumping”

CAUSES OF DUMPING:


Dumping takes place due to following reasons:-

  1. To Maximize Profits: The main objective of the discriminating monopolist is to increase profits. At the beginning he earns higher Marginal revenue for his product when he sell in the domestic market will be much lower than marginal revenue from the international market and hence to maximize to profit.
  2. To Enjoy Economies of scale: There is the possibility that as the producer goes on producing more units, he enjoys economies of scale which would help him in lowering the average cost. To minimize cost and optimize output he will produce up to the point where AC is minimum.
  3. To Penetrate the International Markets: The producer wants to enter in the international market and sells his product their at a relatively lower price.
  4. To Capture International Market: The producer may not just want to enter the international market but even try to tap the international market.
  5. To create employment in domestic market: When unemployment rate remains at higher level government promote dumpling policy for reduction in unemployment rate of the economy.
  6. To control on Overproduction: Some time producers decisions and expectations goes wrong and certain goods and services over produced, that time dumping policy very much useful as a measure on overproduction.
Diagrammatic Representation of Price – Output determination under Dumping


Dumping is international price discrimination. Dumping occur when a producer sells a commodity in a foreign country at a price that is lower than the price which he charges in the domestic market. Price discrimination of the dumping type is possible because domestic and foreign markets are separated from each other because of large geographical distances, tariffs, quota and so on. We shall explain a simple case of dumping type of price discrimination when a producer is selling in the foreign market where he faces perfect competition, while in the domestic he has a monopoly. Accordingly, the demand curve for the product will be perfectly elastic for him in the foreign market in which he faces perfect competition, while the demand curve will be slopping downward in the domestic market in which he enjoys monopoly position.


DIAGRAM


Equilibrium in this situation is depicted in the above diagram. In the domestic market in which producer has the monopoly, demand curve or the average revenue curve AR(D) is sloping downward. So does the marginal revenue curve MR(D).In the foreign market in which he faces perfect competition. The average revenue curve AR(F) of the producer in the foreign market is horizontal straight line and marginal revenue curve MR(F) coincides with it. MC is the marginal cost curve of output. Total marginal revenue curve is the composite curve BFED which is the lateral summation of MR(D) and MR(F). The marginal cost curve MC intersects the total marginal revenue curve BFED at point E and equilibrium output OM is determined.


The total output Om is to be distributed between the home market and the foreign market in such a way that marginal revenue in each market is equal to each other to the marginal cost ME. From the diagram, it is clear that out of total output OM, quantity OR will be sold in the domestic market and remaining quantity RM will be sold in foreign market at price O-P(D) and O- P(F) respectively. Price in the foreign market OP(F) is lower than the price OP(D) in the home market.


In the domestic market elasticity of demand is less and therefore price charged is higher as compared to the foreign market where elasticity of demand is high, the price is lower.


There are two types of dumping. First type of dumping is called persistent dumping. This persistent dumping is the most usual one and arises when a monopolist pursuing the objective of profit maximization perceives that there exist differences in elasticity of demand in the domestic and foreign market. Therefore, the monopolist maximize profits by charging higher price in the domestic market and lower price in the foreign market due to the elasticity is usually higher in the foreign market because there is stiff competition among various countries and also a relatively larger number of substitutes are available.


Second type of dumping is known as Predatory Dumping. It represents unfair method of competition because under it a producer deliberatively sells his product in a foreign country at a lower price in order to eradicate competitors and benefit control of the foreign market for a short run. If monopolist succeeds in his motive, then he exploits foreign customers by imposing higher price of his commodity, and maximizes his long- run profits.


CONCLUSION:



REFERENCES:



MEANING

TYPES OF PRICE DISCRIMINATION

DEGREES OF PRICE DISCRIMINATION

CONDITIONS OF PRICE DISCRIMINATION

DUMPING: Meaning , Objectives & Graphical Presentation

PRICE DISCRIMINATION: Harmful or Beneficial

CONCLUSION

Reference

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