Prof. More often the product may be slightly differentiated.WHAT IT IS??
Practice of a seller of selling the same product at different prices to different buyers.
. Stigler defines it as ´the sales of technically similar products at prices which are not proportional to marginal costs. if difference in prices are not proportional to differences in costs of producing them.µ Implies that the seller is charging different prices from different buyers for different varieties of same good.
TYPES OF PRICE DISCRIMINATION
LOCAL: when a seller charges different prices from people of different places.
PERSONAL: when a seller charges different prices from different persons.
ACCORDING TO USE OR TRADE: when different prices of a commodity are charged according to the uses to which it is put. Example-electricity
DEGREES OF PRICE DISCRIMINATION
First Degree Second Degree Third Degree
.PRICE DISCRIMINATION OF THE
Perfect price discrimination
Involves maximum possible exploitation of buyers in the interest of the seller·s profits.
Firm charges each customer the most the customer would be willing to pay for each unit he or she buys By assuming that firms could somehow find out maximum price customers would be willing to pay for each unit of output it sells In a way. the seller forces the buyer to pay max amount he is willing to pay for the given quantity of good by threatening him with the alternative of denying him the good altogether.
Consumers as their consumer surplus is eliminated.
Y 10 9 8 7 6 Price 5 4 3 2 1 O
Perfect price discrimination: the
monopolist extracts all consumer surplus from the buyers
AR = MR
Demand 1 2 3 4 5 6 7 8 9 10 D X
. DEMAND CURVE OF THE GOOD IS ALSO THE MRC OF THE SELLER.HERE. EACH UNIT OF OUTPUT IS SOLD AT A SEPARATE PRICE.
ADDS TO THE REVENUE AN AMOUNT EQUAL TO THE PRICE FOR WHICH IT IS SOLD. THEREFORE.
EACH ADDITIONAL UNIT SOLD THUS.
and so on. but not all of consumer surplus Example... extracts a part.Telephone service providers
. a lower price for a 2nd bundle.PRICE DISCRIMINATION OF THE 2ND DEGREE
This involves charging different prices depending upon the quantity consumed(but not across consumers) set one price for 1st bundle of good..
40 Price 30 D· O 10 20 Quantity 30
PRICE DISCRIMINATION OF THE 3RD DEGREE
Most common & practicable When the seller divides his buyers into 2 or more groups & charges a different price in each group Price charged depends upon output sold in that sub-market and demand conditions of that group Example. student schemes
it ill not be worthwhile for the buyers in one town to transfer the goods to another town on their own. product sold in the cheaper market cannot be resold in the dearer market Eg: A manufacturer sells a product in one town at Rs. Buyers will refuse to purchase the good at higher price.
It is not possible to transfer any unit of the product from one market to another i.
.15. Thus price discrimination depends upon the ability of the seller to keep his 2 markets separate. many sellers are selling the same homogeneous product.CONSTRAINTS FOR PRICE DISCRIMINATION
Price discrimination is possible only when
1. So price discrimination will break down if the rich man pretends to be poor. If transport cost between the 2 towns is greater than Rs. Eg: A surgeon charges different fees from the rich and the poor.e.5 per unit..
2.20 and in another town at Rs. The market structure is monopolistic in nature. If perfect competition exists. It is not possible for the buyers in the dearer market to transfer themselves into the cheaper market to buy the product at lower price.
The same good is converted into different varieties by providing different packings. one in a fashionable shopping centre and another at a congested and ugly locality. names or labels in order to convince the buyer that certain varieties are superior to others. If a seller has 2 shops. Ignorance or laziness of the buyers
.WHEN IS PRICE DISCRIMINATION POSSIBLE??
Legal Sanction. buyers will be prepared to pay higher price at the shopping centre than go shopping at the over-crowded place.Electricity Preferences of the buyers.
INTERNATIONAL PRICE DISCRIMINATION
AND DUMPING Producer is selling in two markets. while it is less elastic in the market in which he enjoys monopoly position. This might occur when he sells his product in home country in which he has a monopoly and in the world market which is perfectly competitive. one in which he faces perfect competition. Demand curve will be perfectly elastic in case of perfect competition. while in other he has a monopoly.
Y B K P(h) Price F P(w) C E D
AR(w) = MR(w)
MR(h) O R Output M
Dumping resulting from international price discrimination.
. Persistent Dumping . It·s an unfair method of competition.DUMPING
When a producer charges a lower price in the world market than in the home market. he is said to be dumping in the International market. Predatory Dumping . after which prices are raised abroad to take advantage of the newly acquired monopoly power.is the ¶temporary· sale of a commodity at below cost or at a lower price abroad in order to drive foreign producers out of business.
as well as its sales prices. television sets. steel and other products. This in turn can result in decline in profitability. Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect.EFFECTS
Dumping can harm the domestic industry by reducing its sales volume and market shares.
. and Europeans of dumping cars. job losses and. in the worst case. Eg: Japan was accused of dumping steel. and computer chips in the United States. in the domestic industry going out of business.
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