SEMESTER 1 (Academic year 2022-23)

ECONOMICS

TOPIC- “Price discrimination in Monopoly market”

SUBMITTED TO:

Prof. Riya Kashyap

Faculty

NMIMS Kirit P Mehta School of Law

SUBMITTED BY:

NANDINI BHANSALI

BBA LLB (Hons.) Div F

Roll No. 63
Abstract
This paper analyses the meaning of price discrimination, explaining its different
degrees. Price discrimination is basically selling a product at different prices
according to the willingness of a consumer to pay. It explains how price
discrimination works and helps reduce consumer surplus. With the help of literatures
reviewed the paper also explains how price discrimination impacts profitability of a
form. It explains how Price discrimination will only be successful if the demand
elasticity in each market that the overall market has been divided into is different,
since this would allow the company to charge various prices and produce larger
profits.

Keywords: Price discrimination, Monopoly

Introduction
In a monopoly, there is only one vendor of a good or service or monopolist. Due to
his or her control over pricing, demand, and supply, a monopolist will set prices in
a way that will enable them to make the most money possible. For the same
commodity, the monopolist frequently charges various prices to various customers.
Price discrimination is the term used to describe the practise of charging various
prices for the same product. Price discrimination is defined as “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.” Among marketing tactics,
price discrimination is one of the most common. A firm’s improved ability to price
discrimination suggests a decrease in consumer surplus. A monopolist with
discretionary pricing power frequently employs price discrimination as a pricing
technique. The monopolist employs this tactic to acquire competitive advantage or
to seize market position.
Research questions
• What is price discrimination and its degrees?
• How do firms use price discrimination to their advantage?

Research objectives
• To understand the meaning and degrees of price discrimination
• To analyse how firms use price discrimination to their advantage

What is price discrimination?

According to Robinson, “Price discrimination is charging different prices for the
same product or same price for the differentiated product.” Price discrimination
occurs when a business charges different prices to various customer groups for the
same commodity or service for reasons unrelated to supply costs. The conventional
belief that there is one profit-maximizing pricing for a given commodity or service
is challenged by price discrimination.
Three degrees of price discrimination
In practically every market, price discrimination has grown pervasive. Price
discrimination is often known as monopoly price discrimination or yield
management in economic parlance. In many marketplaces, the level of pricing
discrimination varies.
First degree: refers to a practise of price discrimination in which a monopolist sets
his prices at the highest level that any given customer will accept. Because it entails
the most extensive consumer exploitation, this is sometimes referred to as perfect
price discrimination. Consumer excess is thus not experienced by consumers.
Lawyers and physicians practise first degree.
Second degree: refers to a practise of discriminating against purchasers based on
their ability to pay by classifying them into separate categories and charging them
correspondingly higher or lower prices. This kind of price discrimination is used by
railroads and airlines.
Third degree: When using this kind of price discrimination, the monopolist must
split the market in such a way that goods sold in one market cannot be sold in
another. He or she should also determine the price elasticity of demand for various
submarkets. Age, sex, and geographic location are used to separate the groups. For
instance, senior citizens pay less for rail travel. In theatres, museums, and historical
sites, students receive discounts.

Review of literature
Katz, M. L. (1984), This paper's analysis reveals that pricing discrimination may
increase or decrease welfare. In this paper, the impacts of a specific type of price
discrimination—quantity-dependent pricing—that separates consumers into
knowledgeable and misinformed groups have been investigated. Several different
types of pricing discrimination could be covered by the analysis that is being
presented here. Depending on the consumer type, switching costs, brand loyalty, and
sensitivity to firm-to-firm product differentiation may vary. These variations may
result in various levels of competition to cater to specific consumer categories. In
such markets, each firm might offer several variants of its product in order to sort
consumers by their choice of variant rather than by their purchase size. The research
also comes to the conclusion that allowing price discrimination increases total
surplus in at least certain markets when the number of uneducated consumers is big
enough.
Bar-Gill, O. (2020), This study examined how customers who experience demand-
inflating misconceptions respond to price discrimination in terms of efficiency and
consumer surplus. The emergence of such misconceptions necessitates a review of
conventional findings about the effects of pricing discrimination. Price
discrimination in particular hurts customers more and might even have the opposite
effect of decreasing efficiency rather than increasing it. In marketplaces where false
perceptions are common, policymakers should pay closer attention to pricing
discrimination. The linkages between price discrimination and consumer
misperception that this article starts to explore should be taken into account by
competition authorities and regulators tasked with upholding consumer protection
legislation. Additionally, when big data is used to support higher levels of pricing
discrimination, privacy and data security rules may also be affected.
Li, Youping and Shuai,(2018) Jie, In this article, we examine third degree pricing
discrimination in a market with weak competition and concentrate on its long-term
impacts on entry and welfare. We discover that offering varying prices to customers
who are more or less sensitive to a product's qualities encourages more entry than is
socially desirable. However, depending on customer heterogeneity and the relative
sizes of the groups, the equilibrium product variety may be excessive, optimal, or
insufficient when the companies are required to charge uniform prices. A ban on
price discrimination improves consumer and society welfare, with the exception of
cases where uniform pricing prevents enough entry. These contrast with price
discrimination of the second or first degree that occurs in monopolistic competition
and has been researched in the literature.
Bergemann, D., Brooks, B., & Morris, S. (2015),this paper's goal was to investigate
the effects of new customer valuation information on the distribution of surplus in a
classic monopoly price discrimination environment. They demonstrated that new
knowledge beyond the earlier distribution can significantly influence both consumer
and producer surplus. In general, there are numerous ways that welfare could change
in relation to the benchmark of a single market. They demonstrated that although
more knowledge can never be detrimental to the seller, it can cause the social and
consumer surplus to rise, fall, or alternately increase and decrease. It's critical to
comprehend the welfare repercussions that could arise from the gathering of
consumer preference data in a time when people are becoming more and more
concerned with the protection of their privacy. Frequently while discussing policy,
it is assumed that this will benefit producers and harm consumers.
Lambrecht, A., Seim, K., Vilcassim, N., Cheema, A., Chen, Y., Crawford, G. S.,
Hosanagar, k., Iyengar, R., Koenigsberg, O., Lee, R., Miravete, E. J., & Sahin, O.
(2012), This paper’s evaluation of price discrimination studies in the service
industries in this work has shown the necessity for stronger integration of
quantitative marketing and industrial organisation against behavioural marketing
methodologies and insights. They come to the conclusion that such initiatives are
crucial for assisting businesses in creating the best possible profit-maximizing
pricing strategies for services and for assisting regulators in encouraging businesses
to provide their welfare-maximizing equivalent. They have pinpointed four key
relevant locations. The first is to better comprehend preferences that are reliant on
the pricing structure, for instance, in the context of bundling or even more diverse
nonlinear pricing systems. The second focuses on the requirement to recognise usage
decision dynamics. Third, we suggest further exploring consumer learning under
complex pricing structures. Fourth, in order to take into account the behavioural
impacts we explain, we find it more important to investigate the best nonlinear price
schedule in a competitive environment.
Research Methodology
This research paper used an analytical research approach, and the researcher relies
on secondary data for the investigation. For sourcing trustworthy material, the
researcher turned to books, case studies, Scopus journals, and online pieces. This
research hasn't used any primary data.

Discussion
Price discrimination, as we stated in the beginning of this chapter, is a common
occurrence. Almost all businesses that have market dominance aim to use some form
of price discrimination. In this paper, we have demonstrated how the potential for
customers to conceal their valuation may lower consumer surplus when a monopolist
has some likelihood of identifying the consumers’ value and consequently, charging
them personalised prices. The monopolist boosts the standard price it charges to
unidentified customers for this reason, which is a disadvantage to customers who
don’t hide their valuation. Price discrimination helps organizations to earn revenue
and stabilize the business and helps facilitates the expansion plans of organizations
as more revenue is generated. According to our research, our findings indicate
that the relationship between information and efficiency can only be understood in
the context of how data will be used, which is directly influenced by the preferences
of people who gather the data. Understanding which types of price discrimination
will emerge endogenously and for whom is thus a natural and crucial avenue for
future research. Only when the demand elasticity in two markets differs from one
another is price discrimination profitable. As a result, the monopolist will only
differentiate between two markets' pricing when he discovers that each submarket's
price elasticity of demand for his commodity is distinct. Price discrimination will
only be successful if the demand elasticity in each market that the overall market has
been divided into is different, since this would allow the company to charge various
prices and produce larger profits.
Limitations of the study
• Since only secondary data could be used for the research not much statistical
data could be provided.
• Since no surveys could be conducted the data is analysed with the use of the
other researcher’s work.
• No specific company/organization’s price discrimination policy could be
analysed due to lack of data.

Conclusion
Marketers may use price discrimination as a technique to help them meet their
business objectives. We come to the conclusion that such price discrimination
efforts are crucial for firms to properly establish pricing strategies for services
that maximise profits and for regulators to persuade businesses to provide their
welfare-maximizing counterpart. Price discrimination cannot occur unless three
conditions are met, according to the study. The business must first possess
enough market strength. Second, it needs to pinpoint variations in demand
depending on various circumstances or client groups. Third, the company must
be able to prevent its goods from being resold to different consumer groups.
According to the situation in hand any of the three degrees of price discrimination
can be applied. This paper hopes to help people understand meaning, degrees and
circumstances where price discrimination is used and how it effects consumer
and producer surplus.

References
1. Belleflamme, P., & Vergote, W. (2016). Monopoly price discrimination and
privacy: The hidden cost of hiding. Economics Letters, 149, 141–
144. doi:10.1016/j.econlet.2016.10.027
2. Bar-Gill, O. (2020). Price discrimination with consumer misperception.
Applied Economics Letters, 28(10), 829–
834. doi:10.1080/13504851.2020.1782333
3. Katz, M. L. (1984). Price Discrimination and Monopolistic Competition.
Econometrica, 52(6), 1453. doi:10.2307/1913515
4. Aguirre, I., Cowan, S., & Vickers, J. (2010). Monopoly Price Discrimination
and Demand Curvature. American Economic Review, 100(4), 1601–
1615. doi:10.1257/aer.100.4.1601
5. Bergemann, D., Brooks, B., & Morris, S. (2015). The Limits of Price
Discrimination. American Economic Review, 105(3), 921–
957. doi:10.1257/aer.20130848
6. Li, Y., & Shuai, J. (2019). Monopolistic competition, price discrimination and
welfare. Economics Letters, 174, 114-117.
7. Aguirre, I., Cowan, S., & Vickers, J. (2010). Monopoly price discrimination
and demand curvature. American Economic Review, 100(4), 1601-15.
8. Varian, H. R. (1985). Price discrimination and social welfare. The American
Economic Review, 75(4), 870-875.
9. Cowan, S. (2018). Regulating monopoly price discrimination. Journal of
Regulatory Economics, 54(1), 1-13.
10.Grundey, D., & Griesienė, I. (2011). Price discrimination: A comparative
study of business universities in Lithuania. Economics and sociology, 64-77.
11.Lambrecht, A., Seim, K., Vilcassim, N., Cheema, A., Chen, Y., Crawford, G.
S., ... & Sahin, O. (2012). Price discrimination in service
industries. Marketing Letters, 23(2), 423-438.
12.Liu, Q., & Serfes, K. (2011). Third-degree price discrimination. Journal of
Industrial Organization Education, 5(1), 1-23.
13.Clerides, S. K. (2004). Price discrimination with differentiated products:
Definition and identification. Economic Inquiry, 42(3), 402–412. De Loecker,
J., & Eeckhout, J. (2017). Th
14.Chen, Y., & Schwartz, M. (2015). Differential pricing when costs differ: a
welfare analysis. The RAND Journal of Economics, 46(2), 442-460.
15.Bergemann, D., B. Brooks, and S. Morris. 2015. “The Limits of Price
Discrimination.” American Economic Review 105 (3): 921–957.
doi:10.1257/aer.20130848.