Price Discrimination

The idea of the monopolist behind price discrimination is to get from each
buyer whatever profit that could be squeezed on the basis of the
buyer’s intensity of demand and supply of his product.
Kinds of Price Discrimination
1. Personal Price Discrimination: when a monopolist charges different
prices from different customers for the same product. Like doctors
and lawyers.
2. Price Discrimination according to the Nature of the Product:
unbranded products-like loose tea, sugar and its branded products
and rates of hotels as per seasons. Paperback books and
hardbound books.
3. Price Discrimination according to use: railways and electricity.
4. Price Discrimination according to time: emergency charges by a
doctor, STD calls initially cheaper after some time at night.
5. Geographical Price Discrimination: In hilly areas the price charged
for products.
6. Price Discrimination is also related to age, sex and status of the
Customers: concession at railways, less price for haircut, benefit for
senior citizens, below poverty line etc.

Conditions of Price Discrimination

1. Existence of Monopoly:
2. Separate Markets: consumers and products should not be
transferred from low priced market to high priced market.
3. Difference in the Elasticity of Demand:
4. Goods made on Order.
5. Legal Sanction.
6. Artificially creating the difference between the goods: on the basis
of brands.
7. Behavior of the consumer:
Degrees of Price Discrimination

There are three degrees of price discrimination.

1. Price Discrimination of the First Degree: under this the seller

charges price according to the maximum paying capacity of the
buyer. As high a price extracted from the buyer that he is left with
no consumer’s surplus.
2. Price Discrimination of the Second Degree: under this a monopolist
fixes a price at such a level that the buyers are left with some
amount of consumer’s surplus.
3. Price Discrimination of the Third Degree: under this the monopolist
charges different prices from different buyers by classifying them
into different sub-groups or sub-markets. Like price charged from
the consumers in domestic and foreign markets.
 Price and Output Determination

MC
P1
COST/REVENUE

P2
E1
E
E2
CMR
AR2 OM1+OM2
MR1 AR1 MR2

M1 M2 M
OUTPUT OUTPUT OUTPUT
 Transfer Pricing
It is a device that MNEs utilize in their effort to decrease their overall
tax burden is transfer pricing. Using this technique, an MNE reports
most of its profits in a low-tax country, even though the profits were
earned in a high tax country. For example, if corporate profit taxes
are higher in the parent country than in the host country, and if the
parent firm is exporting to its subsidiary in the host country, the MNE
can lower its overall tax burden by under pricing its exports to its
host country subsidiary, thus shifting profits from the parent to the
subsidiary.
Profits are thus transferred from the branch in the high tax country to
the branch in the low tax country. Conversely, if the host country
subsidiary is exporting to the parent and the parent country has high
tax levels, it would be in the interest of the subsidiary to overprice its
exports, thus decreasing taxable profits in the parent country. The
result is lower overall taxes for the MNE in question.
 Germany (Tax Rate=48%)
A computer is manufactured
by the parent firm at a cost of $2,000.
It is then sold to the firm’s Irish subsidiary for $2,000.
German taxes paid:$0

Ireland (Tax Rate=4%)

The Irish subsidiary turns around and resells
the same computer to the US subsidiary for
$2,500, earning a $ 500 profit.
Irish taxes paid:$20.

United States (Tax Rate=34%)

The US subsidiary sells the computer at cost, for
$2,500. No profit is earned. US taxes paid: $0. The
Irish subsidiary then lends money to the US
subsidiary for future expansion.
 Multi Plant Monopoly
Monopoly that produces the output in two or more plants. Producing
homogeneous products in two plants with different cost structures.

ACy
B MCx F MCy
A E MC
ACx
D H G
C
Cost/ Price

E1 E2 E

AR
MR
Q1 Q2 Q=Q1+Q2
Output