Price Discrimination

Meaning
It means charging different prices from different customers or for different
units of the same product. Instead of charging a uniform price to all the
consumers a monopolist may divide the market into different classes of
people. One market segment may consist of poor, whereas another market
segment may be inhabited by the rich.
The monopolist may charge a lower price to the poor and middle class
people whereas he may charge a higher price to the rich customers. Charging
different prices to different customers for the same product is called price
discrimination.
Examples are Cinema, railways, electricity etc.

When price discrimination is possible

• Legal sanction: Public utilities such as railway or electric supply
companies, cooking gas supply companies are allowed under Law to
charge different prices to different classes of consumers.
• Nature of commodity: It is possible where personal service sold to the
consumers cannot be resold. For e.g. Doctor, Advocate
• Geographical barriers: If two markets are separated from each other on
account of geographical barriers it may enable a monopolist to charge
different prices in two different markets. In international trade, markets
are separated by raising the protection wall and different custom duties are
charged on the imports from different countries.
• Ignorance of buyers: It is possible if the consumers in one market do not
know that a lower price is charged in another market. Ignorance of
consumers thus enables the monopolist to charge different prices.

Conditions of price discrimination

• The different markets in which the product is sold should be separated.
There should be no contact between buyers in the two markets.
• The elasticity of demand in different markets should be different.
• Market must be imperfect.
• Monopoly
• Agreement among rival firms
• Differentiated products.
Objectives of Price Discrimination
• To dispose of occasional surpluses
• To make the maximum use of the unutilized capacity
• To earn monopoly profits
• To enter into or retain export markets
• To develop a new market
• To raise future sales by keeping lower prices
• To destroy competition

Price Output Determination under Price Discrimination

MC

P1 P2
C
E
E1 E2
Price /
cost / AR2 MR
revenue

AR1
MR2
MR1

Q1 Q2 Q
Output Output Output
Market A Market B Total A + B

• Consider two markets, market A with relatively inelastic demand and

market B with relatively elastic demand.
• In last figure, E is the point of equilibrium where MR = MC, OQ is the
total output of the firm. This is to be sold in the two markets at different
prices.
• In Market B, E2 is the point at which MC = MR which is related to MR2.
OQ2 is the output sold in market B and at price Op2
• In market A, E1 is the point at which MC=MR which is related to MR1.
OQ1 is the output sold in market A sold and at price OP1
• Thus, OQ = OQ1 + OQ2
• The price in market A is higher than the price in market B; and the sales in
market A are lower than the sales in market B.
• The total revenue to the firm, however, increases because of price
discrimination.