Sunday, 30 June 2013

price discrimination

price discrimination

A monopolist may be able to engage in a policy of price discrimination. This occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with the costs of production. It is important to stress that charging different prices for similar goods is not price discrimination. For example, price discrimination does not does not occur when a rail company charges a higher price for a first class seat. This is because the price premium over a second-class seat can be explained by differences in the cost of providing the service.
There are basically three main conditions required for price discrimination to take place.
Monopoly power
Firms must have some price setting power - so we don't see price discrimination in perfectly competitive markets.
Elasticity of demand
There must be a different price elasticity of demand for the product from each group of consumers. This allows the firm to extract consumer surplus by varying the price leading to additional revenue and profit.
Separation of the market
The firm must be able to split the market into different sub-groups of consumers and then prevent the good or service being resold between consumers. (For example a rail operator must make it impossible for someone paying a "cheap fare" to resell to someone expected to pay a higher fare. This is easier in the provision of services rather than goods.
The costs of separating the market and selling to different sub-groups (or market segments) must not be prohibitive.
Examples of price discrimination
There are numerous good examples of discriminatory pricing policies. We must be careful to distinguish between discrimination (based on consumer's willingness to pay) and product differentiation - where price differences might also reflect a different quality or standard of service.
Some examples worth considering include:
  • Cinemas and theatres cutting prices to attract younger and older audiences
  • Student discounts for rail travel, restaurant meals and holidays
  • Car rental firms cutting prices at weekends
  • Hotels offering cheap weekend breaks and winter discounts
The aims of price discrimination
It must be remembered that the main aim of price discrimination is to increase the total revenue and/or profits of the supplier! It helps them to off-load excess capacity and can also be used as a technique to take market share away from rival firms.
Some consumers do benefit from this type of pricing - they are "priced into the market" when with one price they might not have been able to afford a product. For most consumers however the price they pay reflects pretty closely what they are willing to pay. In this respect, price discrimination seeks to extract consumer surplus and turn it into producer surplus (or monopoly profit).
Assessment Of Discriminating Monopoly
Or Price Discrimination

Price discrimination is said to occur when a monopolist charges more than one price for an identical product and these. price differences are not justified by cost differences. Is this price discrimination, unchecked monopoly power, collusion, price fixing is beneficial for a society or harmful to a economy is debatable. The main points which go in favour or against of discriminating monopoly are discussed in brief as under:.
(1) Need for Strong Companies to face global competition: The industries which require a great deal of capital need protection and support of th government to face global competition. If these companies are made larger and given more monopolistic power, they. will be able to avail of the economies of scale and face competition in the
global market.
(2) Research and Development: Schumpeter is of the view that it is only the monopolists or the oligopolists that can provide large sums of money for carrying out expensive research and development programmes. So the support for discriminating monopoly.
(3) Capital flow: It is also argued that investors are always looking for profitable ventures and mobilize huge sums of money to enter unto the, industry which is most profitable. The businesses which have monopoly earn more profit and so attract large
,      capital. .
(4) Redistribution of income: The case for monopoly is pleaded on the ground also that it brings a redistribution of income: The monopolist earning huge profits give bonuses, higher reward to the workers. The wealth thus gets redistributed from the rich to the poor.
• Price discrimination is considered as illegal, immoral because of the following
(1)     Preventing growth of competition. The large corporations use price discrimination for obstructing and preventing growth of competition in the industries. It is, therefore, a dangerous and destructive tool in the hands of monopolists.

(2)  Dumping: A monopolist often tries to dump its surplus output on foreign markets at below cost price. When a dumping company succeeds in driving out competitors, it then raises the price of its product. So the price discrimination that lessens competition is considered harmful and illegal.-

(3)  Allocative inefficiency: It is a fact that a monopolist produces goods at a price greater than marginal cost. It represents a misallocation of resources.

(4)  Slows down technological progress. As the monopolist does not face competition of his product in the market, he therefore does not discover and use more efficient technology. The production cost does not fall. The consumers, therefore, pay higher prices for the goods.

, The government plays two basic ‘roles which are contradictory. (i) It promotes competition and (ii) it restricts competition by regulating and protecting certain industries. The government protects the natural monopolies by taking complete control over them. Sometimes they are operated through public private ownership. The most popular trend of the 21st century is the transfer of government business to the private sector. The basic logic behind privatization of business is that incentive to be efficient is greater when one’s own money is at risk. Those who oppose privatization argue that mohopoly must be regulated as it is in the public interest.


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