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Essay price discrimination

An Essay on Price Discrimination

The modern theory of price discrimination began with the work of Pigou (1920). Joan Robinson devoted two chapters of her book The Economics of Imperfect Competition (1969) to the problem of (‘third degree’) price discrimination. Her account examines the conditions that make price discrimination possible, presents a graphical analysis of the discriminating monopolist’s pricing decision which has become the standard textbook treatment, and ends with an inquiry into the consequences of price discrimination for both allocative efficiency and distributional equity. Although Pigou’s and Robinson’s contributions have proved of lasting value, the theory of price discrimination has by no means remained unaltered. 1

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Essay on Price Discrimination | Products | Economics

Here is an essay on ‘Price Discrimination’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Price Discrimination’ especially written for school and college students.

Essay on Price Discrimination

Essay Contents:

  1. Essay on the Meaning of Price Discrimination
  2. Essay on the Motives behind Price Discrimination
  3. Essay on the Conditions of Price Discrimination
  4. Essay on the Degrees of Price Discrimination
  5. Essay on the Desirability of Price Discrimination
Essay # 1. Meaning of Price Discrimination:

Generally a manufacturer charges one price for one product from all the customers but sometimes it happens that different prices are charged for the same product (or service) from different customers. This policy is commonly known as price differential or price discrimination policy.

Mrs. John Robinson has defined price discrimination as follows. “The act of selling the same article, produced under a single control at different prices to different buyers is known as price discrimination”. According Prof. J.S. Bain, “Price discrimination refers strictly to the practice by a seller of simultaneously charging different prices to different buyers for the same goods.”

According to Spencer and Siegleman, “Differential pricing may be defined as the practice by a seller or charging different prices to the same or to different buyers for the same goods without corresponding difference in cost.”

Thus, price discrimination may be of various types such as individual price discrimination, geographical price discrimination use discrimination etc.

Essay # 2. Motives behind Price Discrimination:

From the seller’s standpoint, the differential price that result from the application of various discount structures and from product- line pricing may serve several purpose, it is, therefore (desirable to look first at the company’s structure of price discriminations in terms of its motives, which may be grouped follows:

1. Market Expansion:

Differential pricing that is designed encourage new users or new customers is a common goal product- line pricing, but it also extends over various phases of discount structure, depending upon the circumstances of a purchase by a new user.

2. Market Segmentation:

A major objective of price discrimination is to achieve profitable market segmentation when legal and competitive considerations permit discrimination. It permits the appropriation of the consumer’s surplus so that it accrues to the producer rather than to the consumer.

3. Implementation or Marketing Strategy:

The patterns of price differentials should implement the company’s overall marketing strategy. These price differentials should efficiently geared with other elements in the marketing programme to reach of the sectors the market selected by strategy. In doing so the job of a particular structure of discounts may be quite specific.

4. Reduction of Production Costs:

Differential prices can sometimes help solve problems of production. Seasonal or other forms of time-period discounts may be allowed partly for the purpose of regularising Output changing the timing of sale. For example, since electricity cannot be stored, classification of electric rates is designed to encourage off season users and penalizing users that contributed to peak.

5. Competitive Adaptation:

Differential prices are a major device for selective adjustment to the competitive environment. Discounts are often designed to match what competitors charge under comparable, conditions of purchase, in terms of net price to each customer class. When products are homogeneous, competitive parity is a compelling consideration.

Essay # 3. Conditions of Price Discrimination:

Price discrimination needs some conditions in the market.

They are as follows:

1. Existence or Monopoly:

Discrimination is possible only if monopoly exists and there is no competitor in the market or when the producers enter into agreement among themselves to sell the products at agreed prices.

2. Division or the Markets into Sub-Markets:

The market is distinctly divisible into various parts among which the product cannot be exchanged; examples are a home and a foreign market separated by governmental restrictions or by a tariff wall and the market for hair-cuts or a surgeon’s fees- in the former case domestic buyers cannot import the product at the low price and in the latter services are rendered to individuals personally.

3. Expenditure in Sub-Dividing the Market should not be More than the Expected Profit Increase from Price Discrimination:

Sometimes a monopolist has to incur some expenditure on keeping the sub-markets separate so that he can fix different prices in different sub-markets and the consumers are restrained from transferring the product from one sub-market to the other.

4. Consumer’s Ignorance:

When the consumers of one market are ignorant of the prices prevailing in the other markets, price discrimination can be successful.

5. Difference in Consumer’s Purchasing Power:

Variance in the purchasing power of the customers also helps in price discrimination. Non-price factors in such a situation pay to the producers.

6. Purchaser’s Irrational Feeling:

Some purchasers judge the quality of goods only by the high or low prices. There the policy of price discrimination can successfully be launched.

7. Geographical Distance and Tariff Walls:

Between two distant markets where the transportation charges make differences in the cost of the product, price discrimination can be practised easily.

8. Nature or Goods and Service:

Goods and services which are not transferable among buyers e.g., charging more from rich and less from poor by a doctor can be easily subjected to price discrimination.

9. Sale on Orders:

When the goods are produced on the specific instructions of the customers, price discrimination is possible. One customer does not know what is being charged from the other.

10. Product Differentiation:

Sometimes a monopolist’s market consists of rich and poor consumers. He takes advantage of the whims of the rich and offers the same production in a deluxe packing. Thereby he is able to charge a higher price from the richer section of consumers.

11. Govt. Sanction:

Sometimes government also permits the public utility services like the railway to charge different prices from different consumers, and different prices for the use of electricity by Individual and domestic purposes.

Essay # 4. Degrees of Price Discrimination:

Price discrimination is done only when elasticity of demand for the product is different for different buyers, the amounts demanded of the product differs at the same price i.e., the demand prices differ. Discrimination is designed to gain revenue by varying the price in term of the demand prices of the customers. On the basis of the limit to which a monopolist can go on charging different prices for his product from his customers, various degrees of discrimination were discussed by Professor A.C. Pigou.

(1) First Degree Discrimination:

In discrimination of the first degree the monopolist is supposed to know the maximum amount of money each consumer will pay for any quality. He then sets his prices accordingly and extracts from each consumer the entire amount of the consumer’s surplus. Such a monopolist, in Mrs. Robinson’s phrase, is a ‘perfect’ discriminator.

This is ‘perfect’ price discrimination because it is an extreme limiting case of the same. In practice, few monopolists can and actually do that. An example of limited discrimination of the type is to be found in the practice of doctors of varying the charges on their customers according to their income status.

A breeder of horses dealing individually with various buyers in different parts of the country, with a highly imperfect market and absence of knowledge on the part of each buyer of the prices being charged from other buyers, may be able to carry on perfect discrimination to a limited extent. Obviously, perfect discrimination is useful only in theory as a concept.

(2) Second Degree Discrimination:

It occurs where a monopolist sets different prices for different customers but does not fully exploit their potential demand prices; the monopolist captures only parts of his customer’s consumer’s surpluses. The schedules of rates typically charged by public utilities like railways can be regarded as form of second-degree discrimination.

(3) Third Degree Discrimination:

It means that the monopolist divides his customers into two or more classes or groups on the basis of the elasticity of their demand for the product, and charging a different price to each class of buyers. Each group is a separate market.

In discrimination, of the third degree, the monopolist makes some attempt to benefit from the differences in the elasticity of demand for the product on the part the different groups of buyers. This is the only type ordinarily possible and therefore we address ourselves to this type of discrimination in detail and study the price and output determination of such a monopolist.

Essay # 5. Desirability of Price Discrimination:

Price discrimination is generally hatred as an unpopular idea because justice is supposed to go with the concept of equality and similar treatment among all customers. Therefore, it is considered as anti-social, undesirable and unprofitable act.

But, now-a-days, it has become essential for the seller to create market for the goods taking into consideration the various factors such as economics, social, geographical location, availability of goods, available alternatives etc. Price discrimination is not anti-social, infact, it means charging reasonable prices from all sections of the buyers according to their capacity, status, elasticity of demand, etc.

Such differentiation helps the manufacturer in not only increasing the sale but serving the maximum members of the society.

In the following circumstances, price discrimination is very well justified:

(1) When Community’s Welfare is the Main Aim:

There are many public services which would not be available to the poor if there was no price discrimination. For example, electricity, water, doctor, education may be cited here.

(2) Operation of Public Utility Services:
Such public utilities as railways, electric supply companies and water supply companies must be allowed to have price discrimination. This is because the price of the service has to be kept low.

For example, electric supply rates have to be low for industrial concerns and agricultural operations if we want to encourage industrialisation and agricultural development. This necessitates charging higher price from consumers who can pay, otherwise, costs will not be covered.

Price Discrimination | Model Answer

Price discrimination occurs when a seller charges different prices to different customers for exactly the same product.

2) Explain the benefits to the producer

Price discrimination will lead to the transfer of some, or all, of the consumer surplus to the producer. This means producers’ revenues increase, which is a good thing for producers, but not consumers (they are losing welfare through loss of consumer surplus).

Diagrams and explanations you can use:

1st Degree Price discrimination (the perfect case where all consumer surplus is transferred to the producer)

2nd Degree price discrimination (when producers transfer some consumer surplus in to extra revenue by charging people more if they buy less quantity)

3rd Degree price discrimination (when producers transfer some consumer surplus by segmenting the market and charging different prices to different segments e.g. off peak vs peak, child vs adult vs senior prices)

Different groups of people have different PEDs, and the firm will charge more to groups with inelastic PED (to make more revenue), and the firm will charge less to groups with elastic PEDs (to make more revenue too).

2a) The extent it would benefit producers

The extent it would benefit producers depends on a number of factors. Firstly, it would depend on the price making ability of the firm. If the firm has monopoly power, then its ability to price discriminate will be greater, because it has greater price setting power and consumers have fewer substitutes to choose from.

It would also depend on the ability of firms to extract information from the market. To price discriminate perfectly, the firm would need to be able to know the maximum willingness to pay of all the consumers in the market and then charge them an exclusive price relative to this. In reality, this is an unreasonable assumption, so 1st degree price discrimination is unlikely to benefit producers much. However, 3rd degree price discrimination is particularly effective for train companies, as they are very aware of the necessity people have when travelling during peak hours. This is why peak train tickets are often 3 or 4x the value of off-peak tickets, and this benefits train companies greatly.

3) Benefits to consumers

However, there also some benefits to consumers. These benefits would include:

· Extra revenue generated by the firms may be used to improve product quality – the extra profit generated by the producer could be seen as a form of dynamic efficiency.

· Some consumers will gain – e.g. people who travel at off-peak times on the train can often travel very far distances for huge discounts. Another example is how students get student discounts

· Therefore, price discrimination can have an income redistribution effect. It means people who earn more pay more, and people who earn less are likely to pay less.

3a) The extent it would benefit consumers

· It would depend on a number of factors. Firstly, for extra revenue to improve product quality, firms must reinvest their excess profits in order to achieve this outcome. If profits are not reinvested, then product quality is unlikely to improve – therefore, it would not benefit the consumer in this case.

· There are also likely to be time lags from this investment – it would be some time before consumers feel the benefits of improved product quality

· Furthermore, while it can benefit certain consumers, it depends on the size of the discount offered to certain groups of people. While student discounts can help, a 10% discount from Topshop is unlikely to make a huge difference to students’ standard of living, mainly because the discount is quite small and Topshop sell luxury items. However, a large discount of a necessity item e.g. 1/3 off rail tickets for Under 25s is likely to make a big difference to this group of people

In conclusion, price discrimination is good for producers, however it can be both positive and negative for consumers.