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260, , PRICING, PRACTICES - I, , , , , , , , AC at ETSY, W741 Meaning, 17.2. Degrees of Price Discrimination, -17.3 Conditions for Price Discrimination, 17.4 Conditions for Profitable Price Discrimination, , 17.5 Equilibrium of Price Discriminating Monopolist, 17.6 Dumping, , , , A monopolist being the sole seller of a commodity for which there are no, near substitutes is in a position to influence the price. He is a price maker., Due to the powers that he enjoys, a monopolist usually resorts to price, discrimination. Price discrimination refers to “the act of selling the same, article, produced under single control at different prices to different, buyers”. It is significant to note that price discrimination allows sellers to, have some of the consumers surplus that would otherwise have gone to, buyers. :, , 17.2 DEGREES OF PRICE DISCRIMINATION, , , , There are three different degrees of price discrimination. Usually they are, classified as first, second and third degree price discrimination. Fig. 17.1, explains the different degrees of price discrimination., , ee ee a a. ad

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pricing Practices - I 261, First Degree Price Discrimination takes place where, each customer can, be charged a different price for a good or service. It is usually possible in, the case of services which cannot be transferred from one person to another., Doctors services are cited as an example. A doctor can charge different, fees for each patient. Patients will have to pay these fees as long as they do, not have any alternative good doctor. Doctors, lawyers and others who, render direct services can resort to first degree price discrimination. In Fig., 17.1.A. each unit of the commodity is charged a different price. The seller, takes away all the consumers’ surplus i.e. PRD., , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , “y vt Y+, D D D, P; N Py \ T, Pa, P3, P Py P2 pt Ss, > >, O Dx OX: X2XaX4 Dx O xX Xi Dx, Fig. 17.1 (A) Fig. 17.1 (B) Fig. 17.1 (C), First Degree Second Degree Third Degree, , Price Discrimination Price Discrimination Price Discrimination, , . First degree price discrimination is hardly practised as it requires a complete, knowledge of economic and financial standing of each customer. Acquiring, such.information is impracticable, hence the first degree price, discrimination remains more of a theoretical case., , Second Degree Price Discrimination : Here the monopolist charges each, consumer the highest price he is willing to pay. It is practised when, the, total market is divided into segments and each segment is charged a, separate price. In Fig. 7.1.B. OX,, is sold at OP, price and the subsequent, units are sold at a lower price i.e. OP,, OP, and OP, prices. This situation, may arise if a monopolist is ina position to demark the different localities, based on income group and charge a price accordingly. In Mumbai it is, possible to charge higher or different prices in different areas based on, income level of residents., , Third Degree Price Discrimination :It takes place when different prices, , are charged in different markets which are located geographically ata, £ c -, ~ * eS , distance so that transfer of goods by consumers from one market to the, / i : ile fr economic sense, ‘ig. 7 4, , other is nok weorthiwiile:srone os eee = Ig. 7.1.C if the consumer, , is charged OP, price, monopolist’s revenue is C X\SI » As against this if the

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262 ., Business Economics - I (BMS, BAF, BFM, BBI.: SEM - I), , monopolist sells OX at OP, and XX, at OP,, his revenue would increase by, , P,NTP,. The b, in A sonsumer i he increase, in sellers revenue, loses his surplus by the amount equal to t!, , In our analysis we wil] discuss the Third Degree Price Discrimination. Let, , us point out the conditions under which such price discrimination is, possible and. Profitable., , , , mee discrimination (third degree) is possible under certain conditions,, ey are : :, , 1. Non-Transferability of Goods : A monopolist can charge different, prices for the same good provided the consumers are not in a position, to transfer the goods from one to the other. This could happen only if, the consumers either do not meet each other or incase they do meet,, will not be able to exchange the goods., , 2. Geographical Distance : If the markets are situated at sufficiently, long distances then the transfer of goods may not be economical. For, example, if discrimination is resorted to in Mumbai and Pune markets, and the differerice is = 50/- per unit, then the transfer of goods from, one buyer to other between the two markets is not at all economical., , 3. Political Barriers : Political boundaries prevent the movement of, people from one market to the other. For example Kolkata and Dakha., If trade is not allowed between the countries, then a monopolist who, operates in both the markets can charge different prices for the same, commodity., , 4. Tariff Barriers : If the home market is protected through tariffs, a, monopolist may charge a higher price in the protected home market, and a lower one in the competitive foreign market., , 5. Ignorance : When the consumers are ignorant of the price difference,, they will not mind paying a higher price than what the others pay., , 6. Negligible Price Difference : Even when price discrimination is, resorted to, but the difference in price is too small, the consumers, would not bother about the negligible difference. Attitude of, indifference on the part of consumers enables the monopolist to, discriminate the price. 7, , , , xe, , y, , Cn O00%20 = wp Yer SM, , O ft NA

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q pricing Practices - I 263, | 7, Price-Quality Link : Wher consumers, due to irrationality or for any, other reason consider higher price as an indicator of better ney, then it is possible for a monopolist to charge a higher price to suc, consumers., , s. Location : Goods sold in sophisticated or rich localities or sold in, departmental stores may be charged higher prices than the same goods, sold in poor localities. Snobbish consumers are willing to pay higher, prices by purchasing goods in posh localities or stores., , 9, Government's Sanction : The Government due to welfare, social or, political reasons may charge different prices for the same goods and, services. Electricity for domestic uses is charged lower rates than, commercial uses, girls are exempted from fees or charged low fees in, schools/colleges., , The conditions stated above are necessary for price discrimination to, become possible. Let us now discuss the profitability of price discrimination., , FOR PROFITABLE PRICE, , , , We have outlined the conditions under which price discrimination is, possible. Possibility of price discrimination by itself does not guarantee its, profitability. For price discrimination to be profitable certain conditions, have to be fulfilled. ‘, , 1. Difference in Elasticity :, , Let us assume that our monopolist sells his product in two markets which, are at a geographical distance. This fulfills the required condition for price, discrimination. If these two markets are showing the same elasticity of, demand at every given price though it may differ at two different prices,, discrimination will not be profitable. When elasticity of demand is the same, in both markets, the Marginal Revenue in two markets at every price of the, commodity will also be the same. This follows from the formula MR = AR, , (e-1/e)., , Here MR ata particular price in both markets will be the same. A monopolist, such a situation will not increase his profit by transferring goods from, one market to the other since every additional unit sold will bring the same, , marginal revenue to that of decline in the other market by selling one unit, less, . “

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264, When the elastic;, , will charge a higher price in the less elastic market and a lower price in, the more elastic market. Charging the same price in both the markets,, when they differ in elasticities, will not lead to maximisation of profits,, Therefore 4Monopolist resorts to price discrimination when the elasticities, differ. To illustrate this let us take the example of two markets A and B,, Market A is less elastic with an elasticity of 2 compared to market B with, an elasticity of 5. The price in both markets is € 20 per ‘unit., , Business Economics - 1 (BMS, BAF, BEM, BBI.: SEM - ]), , MR in Market A = AR, (e,-1)/e,. Let us work out MR in market A and B., , MR in Market A = 29 x 221 _ 20 x, , , , MR in Market B, , , , I, N, o, x, Ml, N, oO, x, , From the above example it is clear that MR in Markets A and B differs. It is, ‘therefore profitable to discriminate price i.e. increase the price in A where, sales may decrease marginally but MR will increase. In Market B price, should be lowered. Sales in Market B will increase bringing down the MR., , 2. Distribution of the Total Output:, , Difference in price elasticities requires the redistribution of output between, the two markets. We have seen that more can be sold in an elastic market, and less in an inelastic one. The question therefore arises how much more, or less can be sold in these markets? At what point should the transfer of, goods stop ?, , In order to maximise profit the discriminating monopolist should distribute, , the output in such a way that it should bring him the maximum profit and, , any further transfer of good will reduce his total profit. Such a situation is, , reached when the marginal revenue in both the markets is same. In our, example, MR, = MR,. To achieve this condition the monopolist has to sell, less in an inelastic market. Reduced supply or sale in this market increases, the price whereas the increase in sale in an elastic market brings down the, price. Shifting of goods from inelastic to elastic market stops when the, monopolist finds it no more profitable. When he stops the transfer of goods,, marginal revenues in both markets will be equal (MR, = MR,) but with, different prices. The inelastic market will have a higher price and the elastic, , one a lower price., , ty of demand differs in two markets, the monopolist :, , Siig, , >, , Ss, , Lara, , Price, , canes