Price Discrimination

 It refers to the business practice of a seller of selling the

same product at different prices to different customers.

 A seller makes price discrimination between different

buyers when it is both possible and profitable for him to
do so.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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 Types of Price Discrimination:

Price discrimination may be

(a) Personal,
(b) Local,
(c) According to use or trade

 PD is personal when seller charges different prices

from different persons.

 PD is local when the seller charges different prices

from people of different localities or places.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai 2

 Discrimination according to use occurs when
different prices of a commodity are charged
according to the uses to which the commodity is put.

 Degrees of Price Discrimination:

1. Price discrimination of the first degree.

2. Price discrimination of the second degree.
3. Price discrimination of the third degree.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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 Price discrimination of the first degree:

 It is also known as perfect price discrimination because

it involves maximum possible exploitation of each buyer
in the interest of the seller's profit.

 It occurs when the monopolist is able to sell each

separate unit of the product at a different price
(maximum price possible for that unit).

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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 Every buyer is forced to pay the price which is equal to
the maximum amount he is willing to pay rather than
do without the good altogether. The seller leaves no
consumer’s surplus to any buyer.

 The monopolists’ demand curve becomes the

marginal revenue curve, i.e. you do not have to lower
the price to the higher value customers in order to sell
more. More goods are sold; but price is higher to some
customers.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai 5

 First degree discrimination takes place when
bartering exists between buyers and sellers. The bid
and offer system in the housing market where potential
home buyers put in an offer on an individual property.

Other examples include:

 Negotiating prices with dealers for second hand cars.

 Haggling for the price of a hotel room.
 Antiques fairs.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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 FIRST –DEGREE PRICE DISCRIMINATION

A
P1
P2
Price, Cost Per
P3
Unit(Rs.)

B MC=AC
Pc

Q1 Q2 Q3 QD

Quantity Per Period

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai
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Price discrimination of the second degree:

 It occurs when the monopolist is able to charge

separate prices for different blocks or quantities of a
commodity from buyers and in this way he takes away
a part and not all of consumer surplus from them.

 Thus under this a monopolist may charge a high

price(P1) for first block of say 15 units, the medium
price(P2) for the additional block of 15 units, a lower
price (P3) for additional units of a commodity.

 As a result some consumer surplus is left with the buyers.

 Ex: Setting price for use of Electricity.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai 8

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai
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 Price discrimination of the third degree:

 This is the most frequently found form of

discrimination and involves charging different prices
for the same product in different segments of the
market( sub-markets), based on their price elasticity
of demand.

 Segmentation can be based on several factors:

(a) By geography.
(b) By nature of use.
(c) By personal characteristics of consumers such as
age.
Dr. Sarita Kumari,Professor,SIESCOMS,Navi Mumbai
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Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai 11
Price and Output Equilibrium Under Price
Discrimination

• The monopolist has to divide the total market into

several sub-markets according to the differences in
demand elasticity.

• The discriminating monopolist has to take two

decisions:

• (a) How much total output should be produced?

• (b) How the total output should be divided between

the two sub-markets and what prices he should charge
in the two sub-markets?
Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai
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 For the discriminating monopolist to be in equilibrium,
the following conditions must be fulfilled:

(a) Aggregate Marginal Revenue (AMR) must be equal

to the Marginal Cost (MC) of the total output
(AMR=MC)---1st decision

(b) Marginal Revenues (MR1 & MR2) in the two sub-

markets must be same and also equal to the
Marginal Cost (MC) of the whole output.
(MR1 = MR2 =MC)---2nd decision

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai 13

 Examples of Price Discrimination

• Cinema Tickets
• Airline Prices
• Discount Coupons
• Quantity Discounts

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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When is PD Possible?
• Price discrimination is possible in the following cases:

1. When it isn’t possible to transfer any unit of the product

from one market to another. Markets may be
separated by long distances or tariff barriers so that it
is very expensive to transfer goods from a cheaper
market to be resold in the dearer market.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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3.There may be legal sanction for price discrimination.

4.Price discrimination may be possible due to the

preferences and prejudices of the buyers.

5.Price discrimination may be possible due to the laziness

and ignorance of buyers.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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 When is PD Profitable?

 Price discrimination is profitable only if price elasticity of

demand in one market is different from price elasticity
of demand in the other.

 It is profitable to transfer some amount of good from the

market where elasticity is less, hence marginal revenue
is low to market where elasticity is higher and hence
marginal revenue is larger.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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 International Price Discrimination and
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.

 Difference in prices in the world market and home

market is due to the differences in the price elasticity of
demand in them.

 In the domestic market, elasticity of demand is less and,

therefore price charged is higher as compared to the
international market where elasticity is high (in fact it is
equal to infinity), the price is lower.
Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai
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Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai
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 Types of Dumping:

1. Persistent Dumping
2. Predatory Dumping

 The above mentioned dumping is persistent

dumping.

 Predatory dumping represents unfair method of

competition because under it a producer
deliberately sells it product in a foreign country at a
lower price(even below the cost of production) .

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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• The objective is to eliminate competitors and gain
control of the foreign market for a short period of
time.

• When he succeeds in his motive of gaining monopoly

control of the foreign market, he then exploits the
foreign buyers by substantially raising the price of the
product & thus maximizing his long-run profits.

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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 Thank You

Dr. Sarita Kumari, Professor,SIESCOMS,Navi Mumbai

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