Semester-IV SYBA Subject: Theory of Distribution and welfare economics Module: 1

Topic: Monopoly competition and price discrimination.

Notes By: Shubham K.

“Monopoly is made of two words—’Mono’ and ‘Poly’. ‘Mono’ means single and ‘Poly’ means
seller. Thus, ‘Monopoly' refers to a market situation where one firm or a group of firms which are
combined to have a control over the supply of the product. ”
In other words, Monopoly is a market situation in which there is only one seller of a product with
barriers to entry of others.
Monopoly may be defined as that – “Market form in which a single producer controls the
whole supply of a single commodity which has no close substitutes.”

1. Single Producer or Seller:

There must be a single producer or seller. He may be an individual or a firm of partners or a joint
stock company. This condition is essential to eliminate competition.

2. Absence of Close Substitutes:

The commodity dealt in should have no close competition substitutes. That is, there should be no
other firm or firms producing similar products, otherwise there will be competition.

3. Barriers to the Entry of New Firm:

There must be strict barriers to the entry of new firms either in the market or to do production.

4. The firm is the price-maker and not price taker i.e The firm can sell more at lower price and less
at higher price.

5.Monopolist is guided by the motive of profit maximization either by raising prices or by

expanding the scale of production. Much would depend on his business objectives.

6. There are many buyers on the demand side but none is in a position to influence the price of the
product by his individual action. Thus, the price of the product is given for the consumer.
Price discrimination:

Personal:
Refers to price discrimination when different prices are charged from different individuals. The
different prices are charged according to the level of income of consumers as well as their
willingness to purchase a product. For example, a doctor charges different fees from poor and rich
patients.

Geographical:
Refers to price discrimination when the monopolist charges different prices at different places for
the same product. This type of discrimination is also called dumping.

On the basis of use:

Occurs when different prices are charged according to the use of a product. For instance, an
electricity supply board charges lower rates for domestic consumption of electricity and higher
rates for commercial consumption.

Degrees of Price Discrimination:

Price discrimination has become widespread in almost every market. In economic jargon, price
discrimination is also called monopoly price discrimination or yield management.

First-degree Price Discrimination:

Refers to a price discrimination in which a monopolist charges the maximum price that each buyer
is willing to pay. This is also known as perfect price discrimination as it involves maximum
exploitation of consumers. In this, consumers fail to enjoy any consumer surplus. First degree is
practiced by lawyers and doctors.
Second-degree Price Discrimination:
Refers to a price discrimination in which buyers are divided into different groups and different
prices are charged from these groups depending upon what they are willing to pay. Railways and
airlines practice this type of price discrimination.

iii. Third-degree Price Discrimination:

Refers to a price discrimination in which the monopolist divides the entire market into submarkets
and different prices are charged in each submarket. Therefore, third-degree price discrimination is
also termed as market segmentation.
In this type of price discrimination, the monopolist is required to segment market in a manner, so
that products sold in one market cannot be resold in another market. Moreover, he/she should
identify the price elasticity of demand of different submarkets. The groups are divided according
to age, sex, and location. For instance, railways charge lower fares from senior citizens. Students
get discounts in cinemas, museums, and historical monuments.