Price Discrimination

MEANING OF PRICE DISCRIMINATION

Price discrimination refers to the practice of a seller of selling the same prodirt.
different prices to different buyers. A seller makes price discrimination between diferom
buyers when it is both possible and profitable for him to do so. lf the manufacturer oda

refrigerator of a given variety sells it at Rs. 5000 to one Rs. 5,500 toanoth
buyer and at
buver (all conditions of sale and delivery being the same in two cases), he is practising prua
discrimination.
Price discrimination, as defined above, is not a very common phenomenon.Itse
difficult to charge different prices for the identical product from the different buyers.Moa
often, the product is slightly diferentiated to practise successfully price discrimination. Tha
the concept of price discrimination can be broadened to include the sale of the variousvarietis
Pru
of the same good at prices which are not proportional to their marginal costs. Thus,
ic
Stigler defines price discrimination as "the sales of technically similar products at
which are not proportional to marginal costs." On this definition, a seller is prar
ferent
price discrimination when he is charging different prices from different buyers for thean
varieties of the same good if the differences in prices are not the same as or propo
the differernces in the costs of producing them. For example, if a book costs the pub
58 per unit and its deluxe edition Rs. 65 per unit, then he will be practising price discrut
if he sells the ordinary edition at Rs. 70 per unit and the deluxe edition at per
Rs. 1o
p r i c e d i f f e r e n c ebetueen

this case, he is said to be practising price discrimination because the

price ditier them(Rs
(
the two editions (Rs. 130 70 60) is greater than the cost
-

- 58 7).
difference betwee
complical

Though this second case of price discrimination is very relevant, butl Isis more Sinype

Therefore, for the purpose of analysis given below, we shall restrict ourseiv to to the S
the.
urselvesD r i c e s t o d i l e r e n

case of price discrimination-the sale of the same

product at different pr
C t a l a r The Theonr ofDrie
Price. ons arrived
ed
But the co
at in
case mentioned above.this sin nple
b u y e r s .B u

m p l i c a t e d
case will
591
more
hree
Thre
types
d according
of price
discrimination may be noted. Price
to use or
general valicd in
case of the
(bsdifferent prices from ditferent trade. Price
discrimination mayay be (a) personal
o r

(b)
local,

(bs different
ce disc
discrimination
dont
hareifter prices trom people ofpersons. Price is
personal when
chargesd i t
a ity at one price at
commodity
differer
itterent
home and at or
di s
localitiescrim ination local when the seller
is a

sell
m a ys e l l

1se Occurs when

different places. For seller
another instance
rding to use

is put. Forprices of a
e, producer
which the comm modity commodity price abroad.
Isesto
uses than or
commercialexample, the charqged Discrinination
are
according
purposes. electricity is usually sold at
domestic the to
Discrimination
rate

of Price a
cheaper
pesre
D e g r e e s

Prof
C. Pigou has distinguished between the
on nother ground :() price discriminatio
of three types of following
second degree; and (ii) price discrimination of the
the first
third degree.
i) price discrimination
price dis
(i) price
d
degree,
of the First degree. discrimin,
nination of the
Price Discrimination
Price
D
ct pprice Degree.
Price
also
known as
perfect
discrimination
the interest of the
because this discrimination of the first ded
involves
of each
buyer in seller's profits. Price maximum possible
said to occur when the monopolist is able discrimination of the firstexpicitationis degree
to sell each separate unit of the product
tosell
a different price. Thus under
discrimination of the tirst degree' every
10
buyer is forced to pay the price which is
9
equal to the maximum amount he is willing
to pay rather than do without the good
AR MR
altogether. In other words, under perfect
price discrimination, the seller leaves no
consumer's surplus to any buyer. Perfect
price discrimination requires that the seller
makes a separate bargain with each of his
buyers instead of setting just two or a few
market prices each of which is available to
a good number of buyers. This sort of price
discrimination is also marked by the fact O1 2 3 4 5 6 7 910 DX
Quantity
nat the seller makes an all or nothing Ei 25.1, Pice discriminating monopolist of the trst
bargain with each buyer. In this all or extracts all the consumer Surplus
degree
nothing bargain, the total amount of money form the buyers
which a buyer is
required to pay for a given unit of the good
SOOd is the maximum amount which he isis bhich willing to
to pay for the
is able to
rather than w it. Thus, the seller, under
discrimination of tirst degree, the
inda go
without To up, the
dealindividually with each
each buyer and is able to strike an all or nothing
bargain.
will pay
sum

seller underWith
i the highest price he
charges each buyer unit. In
tor each
ach unit egree price discrimination, separate price for each
such
unit of the he gets, and thus charges
a
he is willing to pay for
other
words, the sellergood
amount
maximum
pay the him the good
forces the buyer to the alternative ofdenying
quantity of the good by threatening him with
together. Perfect price discriminau depicted
is depicted inin Fig. 25.1 s
fron the buyer all extract

the s Now, the monopolist practising perfect

can
discrimination
of none of getting
allernative
plus him with the
which he is
Swhich by getting
threatening
 Mana EARt.
592good
the Thus, the monopolist, under lirst degree price discriminationunit
lor the third
uvil chargo K
unit, Ks. 8
Rs 9 for second buyer is h nd s
10 for irst unit, which a
v e r s Rs
the monopolist will
charqe the highest
price
surplus
prepare
ared to
nits consumer s
will be left with
no

nsult, the buver is worth

noting.
discrimination

An important point
about perfect price
curve of the seller
liesbelow tho
demand Nhile und
curve of the bu
reveue
marginal
simple monopoly. the demand
uyer also
tiobecome
nalRs. r t
discrimination
buver, under perfect price illustration, the seller

marginal revenue curveof the seller.

that is,
In the above
the price which he charges for the ioal f diunit,
of Rs. 10 from the first
unit,
tor the second unit Rs.8ron
which he charges
unit and so on. In other uon
the price
the second unit, i.e.,
which charges
he for the third the ta
unit, i e . , the price revenues of the seller. Undo
marginal nde
litional unit perter
the successive
9, Rs. 8 and Rs. 7 are price. Each additi
discrimination each unit output is sold at a separate
of for which it is
sdd he
thero
adds to revenue an mount equal
to the price sold. Under ees
perfe
is, theretore, also the marainal. inal reverue o
discrimination, the demand curve the good
of
of the seller.
Second Degree. Price discrimination of uthe s
Price Discrimination of the
occur when a monopolist
ces tsor
is able to charge separate prices
degree would difer
blocks or quantities of commodity from
a

buvers and in this way he takes away part,

a

consumer surplus from them.

but not all of D
Thus. under the second degree price
discrimination a monopolist may charge a high Consumer
The
Natu
medium Surplus
price for first block of say 10 units, the 50 e r eS n

price for the additional block of

10 units, and sTesae of
a lower price tor additional units of a
commodity. For example, a monopolist may 8 40 B P S Chargeditfe
ASCe tor tner
charge trom a buyer a price of Rs. 50 per unit
for the first 10 units, Rs. 40 per unit for the ZETE. I Camo

next 10 units and Rs. 30 per unit for the 30 C

additional units of the commodity. As a result, Lang Dist
some consumer's surplus is left with the buyers.
This second degree price discrimination is
depicted in Fig. 25.2. 10 20 30 .d
Price Discrimination of the Third Quantity
Degree. Price discrimination of the third Fig. 25.2. Different Groups Under Pree
Discrimination of the SecondD
degree is said to occur when the seller divides
his buyers into two or more than two sub-
prieir
markets or groups depending on the demand
conditions and charges a dije
each submarket. The price charged in each sub-market depends upon the outpui
onoft
that sub-market and the demand
conditions of that sub-market. Price disefind
third degree is most common. A in
common example of such
practice of a manufacturer who sells his product at a discriminano
abroad. Again,
the third higher price at home aOma company

degree price discrimination is found

when an
e l e c t r i c

the
manutac
electric power at a lower
price the households and at a
to
higher price to"
b e l o u , u r u

who use it for industrial

purposes. In our analysis of
assume only third degree price price discriminaio ticable
discrimination
most commonly found in case of the since this is usually more pi
real world.
P r i c eD i s c r i l l

WHEN IS PRICE
mental conditic
mination can occur
are DISCRIMINA
ecessary thetor 1ON POSss 593
Tu
First. priCe discrimi
cur only if price LE ?
one
m a r k e t tto
discrimination
another. In other words, possible it is
not
to
transfer become possible
t from
in different to
Hducthe is selling po
onl when

him in the
arket can
cheaper market arkets
cannot be resold
seller a
which are divided in practise priceany
can unit of the

way natdiscriminatio
seller will break down in the
if his such
in the dearer market. Price that
a
the original

the buyers product solkd

toad of buyers
resell it to
nd ot the dearer cheaper discrirnination by
buying from him willmarket. Buyersmarket
r o mh i 7

in the purchase the

originalseller will
e product
cheaper m a r k e t . Thu
seller can charge
a
buy the dearer market of the
the ditferent product
product being transferred from prices in the two from the buyers of
possibi ibility of his
pos essential condition for price the
cheaper
heaper markets when there s
Second
discriminatios to market to the
the dearer market occur
dearer market
pos aroduct or service at the
to is that it

lower transfer themsel ues into

should not be
marke

from the poor than

n from price. For instance. the
a smaller fee from the rich, then his if a doctor is cheaper
rich
man ca aretendto be poor and
pay a price discrimination
poor man's
charging
will break down
if a
Itis
ahove
clear from above that for the price charges to the doctor
nor the unit ot demand (i.e., discrimination to become
ther
theother. In words, there snouia buyer) can be transferredpracticable, neither the
not any seepage
be from one market to
Thus price discrimination or
wO markets.
two
mato depends upon the ability communication
of the seller to
betwveen the
markets quite separate. If
If 1
he is not
separate. able to keep the keep two his
him will break
br different markets
rimination by down. Price discrimination is
possible
separate. the price
in the
T h e Nature of the
Commodity. Ihe nature ot the following cases
, tthore is no
such ot possibility commodity
transterence from one market to or
service may be
the other. The
acois the sale of direct personal services like that of a most usuai
lkcharge different fees trom the rich and the
or surgeon lawyer. The surgeons
poor tor the same kind of operation. This
ispossible for them since the service has to be delivered personally by the
therefore, it cannot be transterred. Neither is it possible tor the rich men to assume
surgeon
to be
so easily in order to pay the smaller fee. poor

Long Distances o r Tariff Barriers. Discrimination often occurs when the markets
2.
are separated by long distances or tariff barriers so that it is very expensive to transter
goods froma cheaper market to be resold in the dearer market. A monopolist manutacturer
at Chennai
may sell his product in one town, say Kolkata, at Rs. 20 and in another town. say
Delhi, at Rs. 15. If the transport cost between Delhi and Kolkata is greater than Rs. 5 per unit
it will not be worthwhile for the buyers in Delhi to transfer the goods to Kolkata on their oWn.

ary, if a seller is selling his good in two different markets, say, in a home market which
ected by a tariff and in a foreiqn market without a tariff. he can take advantage ot the
arit
and can raise the price of his product in the home market (which is protected by
the tarifn A
tarit. As a result, he will be selling the product in the foreign market at a lower price than
at home. This practice of selling the product at cheaper rates abroad than at home is

often known as
3. 'dumping. sanction for price
discrimination.
Legal In some cases there may be legal
example, anSanction.
For examnl
Or it it is used tor
domestic
at a lower price
purposes
liahes and at
and electricity company sells electricity
In this case
custonmers are

liable to be at a e
higher
r price if it is used for commercial purposes.
if the sanction
has been
b e firfined
ted for fined if they use electricity for
commercial purposes ditterent
raikways which charge
domestic puPOSes only. The
res for avellina
travelling
fodomestic is the case with
same the service of
compartments.
Though
rirst Class, and Second Class
*
 594
slightly cilters in each h
case but
gerial Econom
Cartying rendered in two classes of compartments the flerences,
t a r e s are out of proportion to the differences
in comBorts provided. So this is
S¢
a

discrimination bv legal sanction. It is

unlawtul and a criminal offence toi cdear case
price in he irg
class with a ticket for the second class.
4. Preferences Prejudices of the Buyers.
Price discriminatior
or
possible due to preferences or prejudices of the buyers. 1 ne sane good is generall ay become
into difterent varieties by providing different packings. different names or labels in order to
ifferent prices
to others. Ditterent prices are
coeonvetud
convince the buver that certain varieties are superior

for difterent varieties, although they differ only in name

or label. In this way the nre arge
Usually able to break up their market and sell the so-called superior varieties to the produce
r ane
at higher prices and the so-called inferior varieties to the poor people. Sometimo.
some actual difference in the various varieties of the good, ror instance, generallu t
peope
Sometimes there is
difference in the paper used and quality of the binding between the deluxe edition andthere a
edition of a book, but the difference in prices of the two kinds of edit ditions is mo inary
proportional to the extra costs incurred on the deluxe edition. So, this is a clearea.than
ase oi prce
discrimination based on the preferences or prejudices of the various buyers of the
the prod
IS worth quoting Joan Robinson in this connection. "Various brands of a certain artiel
in tact are almost exactly alike may be sold as different qualities under names and label dwhich
rich and snobbish buyers buyers, and in this a uhich
to divide themselves from poor
mauce is split up and the monopolist can sell what is substantially the same thina atwaysa.
market
eral
prices.
Another case of price discrimination falling in this category 15 that when some people
prefer to buy goods in a particular locality at a higher price. For example, if a seller hash
shops. one in Connaught Place which is the most fashionable shopping centre in Delhi and
another at Sadar Bazar which is very congested and ugly locality in Delhi, he may be seling
the same product at a higher price in Connaught Place and at a lower price in Sadar Bazar. h
is the fashionable and rich people who usually buy goods in Connaught Place and they will be
prepared to pay a higher price rather than go for shopping in the congested and ugly lcaliy
of Sadar Bazar.
5. Ignorance and Laziness of Buyers. Price discrimination may become possk
due to ignorance and laziness of buyers. If a seller is discriminating between two markets but
the buyers of the dearer market are quite ignorant of that fact that the seller is selling he
product at a lower price in another market, then price discrimination by the seller will prs
Price discrimination will also persist if the buyers of the dearer market are aware of the selt
act of selling the same product at a lower price in another market but due to laziness mayn
go for shopping in the cheaper market. In these cases if the ignorance is removed oraa

is given up, the price discrimination will break down.

requie
6. Price discrimination may become possible when several groups of buyea uyers

the same
service jor clearly differentiated commodities. For example, railways
different rates of fare tor the transport of cotton and coal. In this case price disc
ta advantag
possible since bales of cotton cannot be turned into loads of coal in order to take a
of the cheaper rate of transport for coal.
Under which Market Structure Price Discrimination is Possible ?
DOssibk

We have seen above those conditions under

which price discriminatoinai
Now, the question arises under what market form
a seller can
practise price aisc
rimination

oan Robinson, Economics of Imperfeci mpet

 enceDiscrmination 595
rfect or pure
competition no
ous that u n d e r
bupers for the same product. Under seller can charge different prices
er
pertect
rom.differolling
manysellersselling
the homogeneous product. If
any
or
seller tries
pure
to
competition, there are
orevailing market price, they will refuse to charge from some buyers
evailing price from other sellers. It isbuy from him and will buy
higher pricethan

the
a t the
errodu tor pure competition price discrimination worth noting that under
same
p r o d u c t

o n d i t i o n s o f
p e r f e c t

into separate cannot prevail even if the

itions oasily divided parts. This is so because if
conditions of
market, then sellers will confront aperfect or
m a r k e tc a n b e
in each part of the whole
prevail
urecompetitio
tion
in eeach
in ack
part and will like to sell the whole of his perfectly
output in that part of the
c u r v e

demand
t h e highest price
prevails. But the
cic attempt by all sellers to do so would force
o competitive
u h i c h

in
the
cos level so thata
single price will prevail
nthe pr if. collers under periect compennon, combine or arrive at throughout
market to
price
the whole
the
dowTn some understanding,
market. B u t .
"So long as market is
prices. "S
dis
an
discriminate
perfect it is if all sellers are only
acting in agreement that they can take aduantage of the barriers between
can

they
hen
combined rket a
and
n d .another to charge different prices for the same thing."
market
However,
ofa that f all sellers combine or enter into an agreement regarding price
onepart p o i n t e d

be
competition ceases to exist. We thus see that price discrimination is
i
may
discrimination,
perfect
under pertect competition.
n op
t o s s i b l e

competition, price discrimination can occur. The degree of price

opolisticc
Inder
tian practised depends upon the degree of imperfection in the market. The
when the product is differentiated and every seller has
prevails
nolistic
monopolisti
competition
who will not move so readily from one seller to another. Therefore,
attached customers
exists and also the market can be divided into different parts by a
nalistic competition
possible. It should be noted that in this c a s e
an
becomes
discrimination
lor then price
a single variety of the product but may produce
various
may not produce
individual seller thus break up his market into different parts and charge
and may
Larieties of his product occur only if extra
different varieties of his good. Price discrimination will
diferent prices for to the extra costs
varieties are not proportional
for the s o called superior
prices charged
incured on them.
there is monopoly of the product
But price discrimination is more likely to o c c u r when the samne
agreement among
the various sellers selling
by a single seller or when there is
the same good or
exists when there are no other sellers selling trom
product or service. Monopoly monopolist is in a position to charge difterent prices a r e
SClose substitutes. Therefore, Price discrimination also usually Occurs
when there

erent buyers for the same qood. o r same

service but there
is agreement among them
vanio product For instance, doctors have
e s selling the
same
different groups of buyers. rich and lower
ng different prices from fees from the
h each other to charge higher
ne understanding with
fees hfrom the
eps
poor. PROFITABLE?
DISCRIMINATION
Price
WEEN IS PRICE discrimination is possible.
We have seen conditions price prices in the
discriminate
under what to but it
dbove the monopolist d i s c r i m i n a t e prices
Knimination may be possible yet it may not pay
be able to c o n d i t i o n s it
is
separate
may not markets. o
In tother words. the
h e r words,
m o n o p o l i s t may

to s e e
now
under what
markets.
Price
We have the two
profitable for him do Tor him to so. between
is different
titable for the monopolist to discriminate
prices
of
demand in one
market

imination
Oisi pnmfi
proj
s only if price
elasticity

179
Eronpmics of impefe
596
elastieity of
demand in the other
he
Therefore,

fids that
the
the
olbolis
he price el will
Manager
onopolist w
sticity of
hocity
lalE
from prie only when We shall analyse
below this
condidemand
tie ot
markets
behueen huo sub-markets.
prives different
in the
prodacts different discrimination.
of price Markets a tor
sticity-elastic fder
profitablity Separate
Curves in the
Demand every price the e l
kl When iso-elastie so
that at

monopolist to charo
of de
of
cunes ih the huo
huo markets s
the
markets are

same, then
it will not pay the
of demand
isIs the same in the twn
the same twO markets Pice
eren. mand nt
elasticity
huo markets Why? When
t h a t marginal
revenues in the two
twO marko
markets at ever
los tre
the formalbh. MR-AR Now, if marginal revenus
very pricele
wl also be the
same.
maery
every AR) of the good the tuo markets, it will not be profitable for the price Dr.

in chnopoli
product isthe same to the other and thus to
charge
any amount of the good
tuo markets
from one market
different prices q
the good in the Different Various Market
in
When Elasticity
of Demand is sets at the Sin
be to the advantage
of the set diffon
monopolist to set
different
Monopoly Price. t wil prices if
the tuo markets at
the single monopoly price are nCes
ice are not pio
elasticties of demand in
discniminate prices if price elacti.
the sam
fact he wants to maximise profits
he must
monopoly price are different.If the producer regards
ot ticities dema
in the tuo markets at the single
a single monopoly price
on thebasis of agom
basis of aggregate
hao markets as ane and charges
enue and marginal cost
of the output, he would not be maxi if marg
aximising protits elasticite
mand in the tuo markets
at the single monopoly pice are different. If prico l tiesi
mand is the same in the two markets at the single monopoly price, it wil no
onopolist to discriminate betueen the two markets, even if the elasticities aro d
her prioes.
Suppose an the basis of aggregate marginal revenue and marginal cost, a monou
sa snge price (uhich is caled the single monopoly price) and charges the same prer
both the markets. F he now finds that price elasticity of demarnd at this single monopolypm
is diferent he can increase his total profits by discriminating prices between the two matit
How is t proitable for the monopolist to charge different prices in the two markets ai
price elasticities of demand in them at the single monopoly price are different? Thistibe anc

rom the forma, MR=AR When average revenue in both the markets isthes
that is, uben the monopolist charges a single monopoly price t pr
in both the marke
easctes are diierent in the two markets, then marginal revenues in the two markes and
ditierent. Suppose the single monopoly price is Rs. 15 and price elasticity o Stmp
markets A and B is 2 and 5 the r
respectively. Then, mone
In pri
MR in market A -
AR, a Sub-nm
ea
analys
marke
-15-15x-7.5
decie sdiviios
MR in market B AR -1
eb market
=15x5-1
5
 =15x 5 =12 597

ear arginal reven

. k a r that marginal
revenueS in the two
the single monopoly price are markets are
that the marginal different. Further.different when price elasticities
STeater th the arginal
revenue in the from the above
srgater iar the Tevenue in the market in which
price
numerical
numerical
p r o f i t a b

monopolist to transter market where price elasticity is

Auhere asticity of theeelasticity is lower.
ela is less and. some amount
theretore,
her and, theretore. marginal revenue is low product from the
jasti ales in market A marginal revenue is to the market B
by some larger. In this
marginal units will be smaller way, the loss of
sina sales in market 5
m
i s withdrawn trom marketby A.those units. Thus. in
the above
than the gain in
rit the p r o
the pr os by
one more unit of the
the loss in
revenue will be Rs. 7.5, example,
if one
ADOn to.
product in market
B.
while with
12. It is thus clear tha
at the the
transterence ot some units of the gain in revenue will be
A R s

ne there is difference in pice elasticines of

demand and hence inproduct will be profitable
h mentioning that when some units of the marginal revenues.
B . price in market A wil ise and price in theproduct are transferred from market
market B will fall. This means that
sist will now be discriminating prices between the two markets.
hre a relevant question arises: how long will it be
profitable for the monopolist
shifting his product from the market with lower
to
elasticity of demand to the market
h g r elasticity ot demmand? It is worthwhile tor the
monopolist to go on transferring
s o m market A (with lower elasticity ot demand) to market B (with higher elasticity of
mancd) until the marginal revenues in the two markets become equal. This is because as
crg as marginal revenue in market B is greater than that in market A, he will be making
aion to revenue in market B by selling an additional unit of the product more than the loss
e w be incuring in market A from reducing sales by one unit. When the marginal revenues
nhe two markets become equal as a result of transference of some units of output, it will no
A to market B. When the
cnger be protitable to shift more units of output from market
OSiDon ot equality of the marginal revenues in the two markets is reached, he will be charging
arerent prices in the two markets-a higher price in market A with lower elasticity of demand
a lower price in market B with a higher elasticity of demand.