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NATIONAL UNIVERSITY OF STUDY AND

RESEARCH IN LAW, RANCHI

ECONOMICS PROJECT
PRICE DISCRIMINATION

SUBMITTED TO: SUBMITTED BY:

DR. SHWETA MOHAN YASH SINGH
NARUKA
ASSISTANT PROFESSOR SEMESTER- I
ECONOMICS SECTION- B
ROLL NO-1329
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DECLARATION
I, Yash Singh Naruka, a first semester BALLB student of National University of Study and
Research in Law, Ranchi, hereby declare that the project titled “Price Discrimination” under
the guidance of Dr. Shweta Mohan Mam, faculty of Economics, is an original work. I have
made sincere efforts to complete this project and have not done any misrepresentation of fact
or data.

I declare that the statements made and the conclusions drawn are the bona fide outcome of
the research work. I further assert that, to the best of my knowledge and belief, proper
references have been given and does not contain any work that has been submitted in any
other university.

Yash Singh
Naruka
Semester- I
Roll Number-1329
NUSRL, Ranchi
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ACKNOWLEDGEMENT
I, Yash Singh Naruka Singh, would like to thank all of those who helped me during the whole
procedure of making this project and helped me in completing it successfully.

Firstly, I would like to thank my teacher and mentor Dr. Shweta Mohan who showed faith in
me by providing such a wonderful topic. Her constant guidance has played a vital role in
completion of this project successfully. Her keen attention helped me to deal with each
problem that I faced during the making of this project. My heartfelt gratitude to all the staff
members and administrators of NUSRL for providing me with a wonderful library. Their
support cannot be expressed in words.

Finally, I would like to thank God for his benevolence and grace in enabling me to finish this
task. I express my heartfelt gratitude to my parents, siblings, and friends who helped me to
complete this project without much problems.

Thanking you

Yash Singh
Naruka
BA LLB
Semester-I
Roll No. – 1329
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TABLE OF CONTENT
Sr. No. Topic Page no.
1 Declaration 2

2 Acknowledgement 3

3 Introduction 5

4 What is Price 5
Discrimination?
5 Types of Price 6
Discrimination
6 When is Price 7
Discrimination
possible?
7 Under which 8
market structure
Price
Discrimination is
possible?
8 Price 9
Discrimination &
Social Welfare
9 Sources & 10
Bibliography
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Introduction:
In today’s rapidly growing world, almost everything is revolving around money. For last 200
years capitalism has spread over most of the countries. So, almost everything now has a price
of itself. In the limited resources we possess, we can get anything we want. We get services
from professionals like lawyer, doctor, charted accountant, etc and we get goods we want like
bread, cloths, house, etc. all of these things have a particular price at which they are to be
sold. But sometimes these prices are altered by the seller for different buyers.

In Economics, this concept of differences in price for different persons is referred as Price
Discrimination. This concept has been thoroughly discussed by many Economists of the
world. It can occur due to many reasons like personal biases of the seller or rich-poor
difference. Price discrimination is found throughout the world, in different economies it has
different applications and characteristics. Sometimes this concept is morally and
economically beneficial to the society as whole but sometimes it’s an unfair trade practice.

What is Price Discrimination?

Price discrimination is a selling strategy that charges customers different prices for the same
product or service based on what the seller thinks they can get the customer to agree to. A
seller makes price discrimination between different buyers when it is both possible and
profitable for him to do so. If the manufacturer of a given smartphone of a same variety sells
it at $500 to one buyer and at $550 to another buyer (all conditions of sale and delivery
being constant), he is practicing price discrimination.

But it is not easy for the seller to practice price discrimination. Setting different prices for
identical product is a cumbersome task. Often, the appearance or configuration is slightly
altered to make price discrimination look fair.

The concept of marginal cost also applies here. Price discrimination can be broadened to
include the sales of goods or services of various varieties at same prices which are not
proportional to their marginal costs. Thus, Prof. Stigler defines price discrimination as
“sales of technically similar products at prices which are not proportional to marginal
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costs.”1 On this definition, a seller is doing price discrimination when he 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 a book costs the publisher $58 per unit and its deluxe edition $65 per unit,
then he will be practicing price discrimination if he sells the ordinary edition at $70 per unit
and the deluxe edition at $130 per unit. Because here the price difference (130-70=60) is
greater than cost difference (65-58=7).

Types of Price Discrimination:

Basically, there are 3 types of price discrimination:

1. Personal: price discrimination is personal when a seller charges different prices from
different person. For example, as a candy shop owner, I will give candies at cheaper
price to my siblings and at higher price to neighbour kids.
2. Local: price discrimination is local when the seller charges different prices from
people of different localities or places. For instance, Apple inc. selling I-phones at
cheaper rate in USA (native market) as compared to India (foreign market)
3. According to use or trade: discrimination is according to use (or trade) when different
prices of a commodity are charged according to the uses to which the commodity is
put. For example, students get free or subsidised tickets during their visit to some
historical sites, where in place other commoners have to pay the normal price.

According to famous Economist A.C. Pigou, price discrimination can be segregated on

another ground i.e., on the basis of degree:2

i. price discrimination of the first degree

ii. price discrimination of the second degree
iii. price discrimination of the third degree

Price discrimination of the first degree involves maximum possible exploitation of each
buyer in the interest of seller’s profits. It occurs when the seller is able to sell each separate

1
G.J. Stigler, The Theory of Price 215, (Macmillan, New York, 3rd edn., 1967)
2
A. C. Pigou, The Economics of Welfare, (Cambridge University Press, Cambridge, 1st edn., 1981)
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unit of the output at a different price. Thus, under discrimination of the first degree every
buyer has to pay the maximum amount he is willing to pay which in the end leaves no
surplus for the consumer. Example, I bought a t-shirt of $60. But my mother who is good at
bargaining, bought the same product in $40. Me and my mother had different maximum
amount which we were willing to pay for a particular product.

Price discrimination of the second degree would occur when a buyer is able to charge
separate prices for different blocks or quantities and in this way, he takes a part, but not all
of consumer surplus from them. For instance, a seller may charge $30 dollars for first 10
units, $20 for next 10 units, $10 for next 10 units.

Price discrimination of the third degree occurs when the seller divides his customers into
different consumer groups. For example, a theatre may divide moviegoers into seniors,
adults, and children, each paying a different price when seeing the same movie. This
discrimination is the most common.

When is price discrimination possible?

There are many conditions under which price discrimination can possibly occur, following
are some them:

1. Nature of the commodity: the nature of the commodity or services may be such that
there is no possibility of transference from one market to the other. The most usual
case is the sale of direct personal services like that of a surgeon or a lawyer. The
surgeons usually charge different fees from the rich and the poor for the same kind of
operation. This is possible for them since the service has to be delivered personally by
the surgeon and therefore it cannot be transferred. Neither is it possible for the rich
man to assume to be poor so easily in order to pay the smaller fee.
2. Long distances or tariff barriers: long distances and tariff barriers increases the cost
of production. But the manufacturer turns this opportunity into his favour by showing
much higher manufacturing cost. Like, X sells a particular variety of refrigerators at
Rs.6000 in Mumbai (main manufacturing centre) and he decides to open a showroom
of his product in Delhi. It takes him Rs.1500 to pass through tariffs and get it
transported to Delhi, raising the overall price to Rs.7500. but in paper work he will
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show that he incurred extra cost while transporting the product and selling the product
at Rs.8000 in Delhi. In this way X is practicing price discrimination.
3. Legal sanction: in some cases, there may be legal sanctions for price discrimination.
For example, an electricity company sells electricity at a lower price if it is used for
domestic purpose and at a higher price if it is used for domestic purpose and at a
higher price if it used for commercial purposes. In this case customers are liable to be
fined or penalized if they use electricity for commercial purposes if the sanction has
been granted for domestic purposes only.
4. Ignorance and laziness of buyers: generally, when price discrimination occurs due
to ignorance and laziness of buyers because they are less interested in bargaining.
Rich people who can afford higher prices tends to lazy in bargaining and feels it
embarrassing sometimes. For example, if 1 litre of water is priced at Rs.20 but the
rich person is ignorant to see the price and directly asks the seller about its price,
then the seller may maliciously tell an inflated price i.e., Rs.30 per litre. That’s how
the seller takes the advantage of the ignorance and laziness of buyers.
5. Preferences or prejudices of the buyers: sellers are biased for some people. They
maybe their friends, relatives or neighbours based on their relations with them. Like
Jethalal would give a special discount to her neighbour Mrs Babita, who is a good
friend of his but he may charge extra price from his sworn enemy Mr Iyer.

Under which market structure Price

Discrimination is possible?
After going through the above-mentioned conditions, a question arises ‘Under which market
situation price discrimination is possible?’. Firstly, we need to understand that under perfect
competition price discrimination is not possible because there are many too sellers in perfect
competition who are selling a homogenous product which makes it impossible for them to
control the supply demand variables of the market. If any seller tries to charge higher price
than the buyer will shift to the other seller without any difficulty. A cartel3 cannot be formed
under perfect competition because it will alter the required characteristics of the particular
market situation.

3
A cartel is a grouping of producers or sellers that work together to protect their interests.
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Under imperfect market conditions (monopoly, monopolistic, oligopoly) price

discrimination can possibly occur. This depends upon the degree of imperfection in the
market. By referring to degree, it depends upon two factors, (i) the degree of control over the
market conditions and (ii) formation of cartel or understanding with other competitors. Apart
from these two, many other factors are also there which play their role concomitantly. If a
particular seller or company has greater control over the market and easily control the supply
demand variables, there would be a greater opportunity for him/her to practice price
discrimination. Thus, in a monopoly market, price discrimination is practiced most. But in
markets where there are some more sellers (monopolistic and oligopoly) than the monopoly
and there is less degree of control in the hands of a particular seller, they for cartels and
increase their understanding with each other for mutual benefits and escaping from loses.

Price Discrimination & Social Welfare:

We have a lot of data available which shows that price discrimination is practiced
throughout various markets of the world. Price discrimination to qualify s social welfare it
needs to morally and legally sound. People have different morals and objectives while
practicing price discrimination. Some of them are morally and legally correct but some are
negatively used by producers or sellers. If a successful lawyer charges relatively lower fees
for a poor man’s case as compared to a rich, this kind of discrimination by the lawyer is both
legally and morally sound and helpful to the society. But in place if a doctor charges less
from his friend who is well-off as compared to a poor who is unknown to him, this may be
legally sound but morally it would be wrong such that it won’t qualify to be a work of social
welfare. Governments of different nations practice price discrimination for upliftment of the
poor, development of backward areas and many other social welfare activities. All these are
done by providing special incentives and subsidies. Like, a govt. gives commercial lands at
subsidised prices for the new industrial projects in the rural locality. This would help in
decreasing the problem of unemployment and jobs would be readily available to them near
their homes which would restrict them from moving to big metropolises for jobs. All these
practices look morally correct and legally sound. But sometimes in reality, these are no more
than political endeavours to increases their vote banks. These policies may be in hands of
corrupt officials, who would take commission of their and no or less profit will remain for
those unprivileged people for whom the original benefit was intended for.
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So, for price discrimination to qualify as social welfare it needs to pass through both the
above-mentioned conditions.

Sources & Bibliography:

1. H. L. Ahuja, Principles of Microeconomics, (S. Chand, Delhi, 22nd edn.,)
2. https://www.investopedia.com/terms/p/price_discrimination.asp (last visited
November 11, 2021)
3. https://corporatefinanceinstitute.com/resources/knowledge/strategy/price-
discrimination/ (last visited November 11, 2021)