Monopoly Price Discrimination

By
Mrs. N. Jayaprada
Price Discrimination
Under certain
conditions, a
firm with
market power is
abIe to charge
different
customers
different prices.
This is caIIed
price
discrimination.
%e Price-Discriminating Monopolist
Price discrimination is te ability to
carge different prices to different
individuals or groups of individuals.
%e Price-Discriminating Monopolist
n order to price discriminate, a
monopolist must be able to:
Difference in price elasticity:
Marker segmentation:
Limit teir ability to resell its product between
groups.
Legal approval if needed
Location of te two markets
Knowledge and awareness of discrimination.
%e Price-Discriminating Monopolist
A price-discriminating monopolist can
increase bot output and profit.
He can carge customers wit more
inelastic demands a iger price.
He can carge customers wit more
elastic demands a lower price.
Necessary Conditions
for Price Discrimination
%e firm must be able to segment the
market"
Bases:
GeographicaI Iocation
Size of purchase order
Purchasing power
Time of purchases
SociaI and professionaI status of buyers
Age of customers
%ypes of Price Discrimination
First-degree: Eac output unit is sold at
a different price. Prices may differ
across buyers.
2nd-degree: %e price paid by a buyer
can vary wit te quantity demanded by
te buyer. But all customers face te
same price scedule. E.g. bulk-buying
discounts.
%ypes of Price Discrimination
3rd-degree: Price paid by buyers in a
given group is te same for all units
purcased. But price may differ across
buyer groups.
E.g., senior citizen and student
discounts vs. no discounts for middle-
aged persons.
bjectives
Maximisation of revenue
Hig inventory accumulations
%o penetrate a new market
Unutilised capacity
Power of monopoly benefits
Capture te market and
Stable demand for te product
%ird-degree Price
Discrimination
MR
1 MR
2
y
1
y
2
p
2
MC MC
p
1
(y
1
)
p
2
(y
2
)
Market 1 Market 2
p
1
AR
AR
%e Early Bird Gets a Lower Price
Early Bird Specials
Restaurants carge
special, lower prices
for early diners.
Matinees%eaters
carge less for earlier
sows.
Air FaresAirlines
carge less for flyers
willing to fly "off peak,
i.e. early morning and
late nigt.
Perfect Price Discrimination
By discriminating, a monopoly firm makes
greater profits tan it would make by carging
bot groups te same price.
A firm wit market power could collect te entire
consumer surplus if it could carge eac
customer exactly te price tat tat customer
was willing and able to pay. %is is called
5erfect 5rice discrimination
"ueries?????
%ank "