What is meant by Price Discrimination? Explain its type in detail.
What is meant by Price Discrimination? Explain its type in detail.
Or
What is meant by Price Discrimination? Explain the degrees of it.
Ans.
In monopoly, there is a single seller of a product called monopolist. The monopolist has control over pricing, demand, and supply decisions, thus, sets prices in a way, so that maximum profit can be earned.
The monopolist often charges different prices from different consumers for the same product. This practice of charging different prices for identical product is called price discrimination.
According to Robinson, “Price discrimination is charging different prices for the same product or same price for the differentiated product.”
Types of Price Discrimination
Price discrimination is a common pricing strategy’ used by a monopolist having discretionary pricing power. This strategy is practiced by the monopolist to gain market advantage or to capture market position.
(i) Personal : Refers to price discrimination when different prices are charged from different individuals. The different prices are charged according to the level of income of consumers as well as their willingness to purchase a product. For example, a doctor charges different fees from poor and rich patients.
(ii) Geographical: Refers to price discrimination when the monopolist charges different prices at different places for the same product. This type of discrimination is also called dumping.
(iii) On the basis of use: Occurs when different prices are charged according to the use of a product. For instance, an electricity supply board charges lower rates for domestic consumption of electricity and higher rates for commercial consumption.
Degrees of Price Discrimination
Price discrimination has become widespread in almost every market. In economic jargon, price discrimination is also called monopoly price discrimination or yield management. The degree of price discrimination vanes in different markets.
There are three degrees of price discrimination are explained as follows:
(i) First-degree Price Discrimination: Refers to a price discrimination in which a monopolist charges the maximum price that each buyer is willing to pay. This is also known as perfect price discrimination as it involves maximum exploitation of consumers. In this, consumers fail to enjoy any consumer surplus. First degree is practiced by lawyers and doctors.
(ii) Second-degree Price Discrimination: Refers to a price discrimination in which buyers are divided into different groups and different prices are charged from these groups depending upon what they are willing to pay. Railways and airlines practice this type of price discrimination.
(iii) Third-degree Price Discrimination: Refers to a price discrimination in which the monopolist divides the entire market into submarkets and different prices are charged in each submarket. Therefore, third-degree price discrimination is also termed as market segmentation.
In this type of price discrimination, the monopolist is required to segment market in a manner, so that products sold in one market cannot be resold in another market. Moreover, he/she should identify the price elasticity of demand of different submarkets. The groups are divided according to age, sex, and location. For instance, railways charge lower fares from senior citizens. Students get discount in cinemas, museums, and historical monuments.
