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Pricing under discrimination monopoly

Pricing under discrimination monopoly

26/June/2025 00:47    Share:   

? What is Price Discrimination?
 
Price discrimination refers to the practice of charging different prices for the same product or service to different customers without any difference in cost of production.
 
> Definition (by Joan Robinson):
“The act of selling the same article, produced under identical conditions, to different buyers at different prices.”
 
 
 
 
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? Objectives / Causes of Price Discrimination
 
1. Maximizing Profit – To extract the maximum willingness to pay from each customer.
 
 
2. Capturing Consumer Surplus – Turning surplus into profit by charging higher prices from those willing to pay more.
 
 
3. Covering Fixed Costs – Especially in public utilities, like transport and electricity.
 
 
4. Market Segmentation – To cater to different income or geographic segments.
 
 
5. Cross-subsidization – Charging higher from one group to subsidize another (e.g., rich vs. poor).
 
 
6. Reducing Competition – By offering lower prices in competitive regions.
 
 
 
 
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? Types of Price Discrimination
 
Type Description Example
 
1st Degree (Perfect) Charging each customer the maximum price they are willing to pay Auctions, consultants charging per client
2nd Degree Price varies by quantity consumed or product version Bulk discounts, electricity slabs
3rd Degree Different prices for different customer groups or markets Student discounts, senior citizen fares
 
 
 
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? Necessary Conditions for Price Discrimination
 
1. Market Segmentation – Markets or customers can be separated based on geography, age, income, etc.
 
 
2. Different Price Elasticities – Groups must respond differently to price changes.
 
 
3. Market Power – The seller must have control over prices (not in perfect competition).
 
 
4. No Arbitrage – Customers paying a lower price must not resell to those in the high-price market.
 
 
5. Legal Permission – In some countries, price discrimination is regulated.
 
 
 
 
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⚖️ Justification of Price Discrimination
 
Economists justify price discrimination when it:
 
Improves social welfare, e.g., charging less for essential goods to the poor.
 
Increases output, by allowing the firm to serve markets that couldn't be reached otherwise.
 
Helps cover fixed costs, in industries with high setup costs (public utilities).
 
Encourages innovation, especially in pharmaceuticals and R&D-based industries.
 
 
> Example: A railway company charges higher fares in first class and lower fares in second class. This allows the company to serve low-income customers while still remaining profitable.
 
 
 
 
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✅ Conclusion
 
Price discrimination is a strategic tool used by monopolists and other firms to maximize revenue and expand market reach. Though it raises ethical concerns, in some cases it is economically justified and beneficial, especially when used to support weaker customer groups.
 


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