Introduction
Price discrimination means charging different
prices from different customers or for different units of the same product. In
the words of Joan Robinson: “The act of selling the same article, produced
under single control at different prices to different buyers is known as price
discrimination.” Price discrimination is possible when the monopolist sells in
different markets in such a way that it is not possible to transfer any unit of
the commodity from the cheap market to the dearer market.
Price discrimination is, however, not
possible under perfect competition, even if the two markets could be kept
separate. Since the market demand in each market is perfectly elastic, every
seller would try to sell in that market in which he could get the highest
price. Competition would make the price equal in both the markets. Thus price
discrimination is possible only when markets are imperfect.
Price discrimination is of many types:
Firstly, it may be personal based on the
income of the customer. For example, doctors and lawyers charge different fees
from different customers on the basis of their incomes. Higher fees are charged
to rich persons and lower to the poor.
Secondly, price discrimination may be based
on the nature of the product. Paperback is cheaper than the deluxe edition of
the same book, for the former is bought by the majority of readers, and the
latter by libraries. Unbranded products, like open tea, are sold at lower
prices than branded products like Brooke Bond or Lipton tea.
Thirdly, price discrimination is also related
to the age, sex and status of the customers. Barbers charge less for children’s
hair-cuts. Certain cinema halls admit ladies only at lower rates. Military
personnel in uniform are admitted at concessional rates in all cinema houses.
Fourthly, discrimination is also based on the
time of service. Cinema houses at certain places, like New Delhi, charge half
the rates in the morning show than in the afternoon shows.
Fifthly, there is geographical or local
discrimination when a monopolist sells in one market at a higher price than in
the other market.
Lastly, discrimination may be based on the
use of the product. Railways charge different rates for different compartments
or for different services. Less is charged for the transportation of coal than
for bales of cloth on the same route. State power boards charge low rates for
industrial use than for domestic consumption of electricity.
Conditions
for Price Discrimination:
For price discrimination to exist the
following conditions must be satisfied:
(1) Market
Imperfections: Price
discrimination is possible when there is some degree of market imperfection.
The individual seller is able to divide and keep his market into separate parts
only if it is imperfect. Customers do not move readily from one market to the
other because of ignorance or inertia.
(2) Agreement
among Rival Sellers: Price
discrimination also takes place when the seller of a commodity is a monopolist
or when rivals enter into an agreement for the sale of the product at different
prices to different customers. This is usually possible in the sale of direct
services.
(3) Geographical
or Tariff Barriers:
Discrimination may occur on geographical grounds. The monopolist may
discriminate between home and foreign buyers by selling at a lower price in the
foreign market than in the domestic market. This type of discrimination is
known as “dumping”.
(4) Differentiated
Products: Discrimination
is possible when buyers need the same service in connection with differentiated
products. Railways charge different rates for the transport of coal and copper.
For they know that it is physically impossible for a copper merchant to convert
copper into coal for the purpose of transporting it cheaper.
(5) Ignorance
of Buyers:
Discrimination also occurs when small manufacturers sell goods made to order.
They charge different rates to different buyers depending upon the intensity of
their demand for the product. Shoe makers charge a high price for the same
variety from those customers who want them earlier than others.
(6) Artificial
Differences between Goods: A monopolist may create artificial differences by presenting the
same commodity in different quantities. He may present it under different names
and labels, one for the rich and snobbish buyers and the other for the
ordinary. Thus he may charge different prices for substantially the same
product.
(7) Differences
in Demand: For price
discrimination, the demand in the separate markets must be considerably
different. Different prices can be charged in separate markets based on
differences of elasticity of demand. Low price is charged where demand is more
elastic and high price in the market with the less elastic demand.
Post a Comment
Kindly give your valuable feedback to improve this website.