Equilibrium Price and Output Determination under Discriminating Monopoly

Meaning of Price Discrimination

Price discrimination occurs when a producer charges different prices for the same product to various customers (or in various submarkets). The seller separates the purchasers into two or more submarkets and imposes various pricing in each of these submarkets. The most typical type of pricing discrimination is this one. Buyers are subject to price discrimination based on factors such as their income or purchasing power, geography, age, sex, quantity purchased, relationship with the sellers, frequency of visits to the store, reason for use of the good or service, and other factors the seller may see appropriate. In the various segments of a firm's market, these factors result in demand curves with varying elasticities. Additionally, it is typical to charge various prices for the same product at various times. Three objectives are primarily pursued through price discrimination. As follows:

• Maximizing profits
• Advancing public welfare
• Encouragement for the less developed economic sector

Some Examples of Price Discrimination

• Doctors can differentiate between patients with high incomes and those with low incomes and charge the former a higher cost.
• Some nations flood the international market with cheap goods in an effort to seize market share.
• There are differing costs for business class and economy class seats on trains and on airplanes.
• The residential sector is charged more by Nepal Electricity Authority than the industrial sector.

Economic Effects of Price Discrimination

The main economic repercussions of pricing discrimination are as follows:

• Mrs. Joan Robinson asserts that overall output under price discrimination typically exceeds output under a straightforward monopoly with a uniform price policy.
• The total profits of a discriminating monopolist will surpass those of a straightforward monopolist. It's because price discrimination at least somewhat aids the monopolist in turning the excess of the consumer into profit.
• Price discrimination promotes greater scale of production and cost minimization by increasing sales and output.
• The economic wellbeing of the community as a whole is improved through socially acceptable price discrimination that results in reduced prices being charged to poor customers.
• In a market that is expanding, an exporting company that engages in dumping can profit from operating a large-scale plant size, which offers significant cost savings.
• The first and second degrees of price discrimination prevent utility maximization.
• In a market economy, price discrimination causes ineffective resource allocation.
• When the wealthier consumers benefit at the expense of the less fortunate, price discrimination can also be unfair.

Conditions for Price Discrimination

The following requirements must be met before pricing discrimination can be put into practice.

• The seller should have some degree of control over the supply of his goods; in some businesses, monopoly power is required to set prices differently.
• The market must be broken down into smaller markets with various price elasticity.
• Effective submarket segmentation is necessary to prevent resale from a low price market to a high price market. The price in the low price segment would rise as a result of the loss in supply, and the price in the high price segment would decrease as a result of the increase in supply, if individuals who purchase in the low price portion of the market can readily resell in the high price sector. Thus, the policy of price discrimination would be compromised.

Degrees of Price Discrimination

The concept of levels of pricing discrimination was developed by English economist Professor A.C. Pigou. Pigou mentions the three levels of price discrimination as follows.

Price and output under first-degree discrimination

In first-degree discrimination, the monopolist is aware of the highest price any customer will ever pay for any quantity. He will adjust the prices accordingly and deduct the whole amount of each consumer's surplus from their purchases. At other words, the monopolist will charge a different price for each individual unit of a homogeneous good in the first degree of price discrimination. In order to prevent consumers from going without, the monopolist strives to charge them the greatest price possible.