Pricing under discrimination Monopoly

A discriminating monopolist is one who charges more than one price for his product, not distinguished by its cost difference. Price discrimination may be practiced in different degrees. Degrees are classified as,

(a) second degree price discrimination
(b) First degree price discrimination
(c) Third degree price discrimination

Under the first degree price discrimination also called the perfect price discrimination, the monopolist charges different price for each unit of his good. Thus, he takes the highest price for the first unit and he goes on reducing the price for every successive unit that a consumer buys from it. This is so because by the law of diminishing marginal utility, a consumers derives less and less satisfaction from the successive units of a good as he goes on consuming more and more units of that good, and thus unless he is offered the successive units at falling prices, he would not purchase the additional unit of a good. By doing so, the monopolist takes full advantages of its monopolist position and thus exploits the consumers to the maximum possible extent. This is an extreme form of discrimination, and it is not found to prevail anywhere today.

Under the intermediate form of price discrimination, the monopolist sets block prices, under which the price is the highest for the first block of quantity bought, and it is reduced for every successive block of quantities ought by a particular customer. Thus, quantity discounts are offered by the firm under this form of price discrimination. This form of discrimination is quite prevalent today. For example, electricity boards have a minimum charges for the first certain units of electricity consumed and then a reduced rate for the extra units used. Currently to discourage use of more power the electricity firms practice reverse trend (increased rate and not reduced rate). The Railways charge for every kilometer reduced as one travels longer and longer distances. Thus, a train ticket of a particular class between Ahmedabad and Bombay is less than two train tickets, one between Ahmedabad and Baroda, and another between Baroda and Bombay on Ahmedabad to Bombay route. Although the firm might incur a little extra cost (in terms of vouchers or tickets) in case of selling in smaller quantities vis-à-vis larger quantities, the price differences are much more than explained by cost differences, and hence these are still the cases of price discrimination.

The price discrimination of the third degree is the most popular form of price discrimination prevalent in most societies. Under this form, different prices are charged for the same homogeneous good from different customers, depending upon various factors, such as geographical location, product use, purchase time, age, sex, and age group of the consumer. Thus, there are several goods, whose prices depend upon the place they are bought. For example, the price of a Bajaj scooter in India is different from one in foreign market. Of course, there are differences in distribution (transport, insurance, custom, etc.) cost but very often price differences are much more than cost differences. Also, there are cases, called dumping, where a product is sold at a high price in the home country and a relatively low price in a foreign country. For example, during the late Seventies India had a bumper sugar cane crop, there was a glut in the domestic market and the Indian sugar was sold at a lower price in foreign markets than in India.

Prices are also found to vary with product use. For example, if electricity is used for illumination, the tariff is higher than if it is to be used for energizing kitchen appliances. Similarly, electricity charges are higher for its uses in industry than for its uses in agriculture.

The examples of price discrimination by time are found in telephone rates and hotel tariffs at holiday resorts. The phone rates are higher during the day and on weekdays than during the night and on weekends, respectively (no longer applicable at present). Similarly, hotel tariffs are high during the season and low during off-seasons.

Price is also found to vary with age, sex, and income category to which the customer belongs. Air and train fare depend upon whether the passenger is under or above 12 years of age. Some pavilions offer discounts to women on tickets for witnessing sports competition. In Maharashtra (Muncipal schools) and Gujarat, girls pay no tuition fees for school and college education. Government hospital often charges from patients on the basis of the income category to which he or she belongs. Indian railways have different rates for second class and first class, and non-air conditioned and air conditioned accommodation. In these though cost differ, the price differences are much more than the ones accounted for by the cost differences. Similarly, Indian railways and airlines offer concessions to students for some pre-specified traveling, and professionals like physicians, advocates, chartered accountants, engineers and professors often their services at lower rates to poor and middle income people than they do to rich people.