Price Discrimination: Monopoly Behavior and Market Segmentation, Summaries of Economics

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Price Discrimination

Prof. Joyita Roy Chowdhury

Economics

joyita.chowdhury@flame.edu.in

Monopoly Behavior

Issue of Market power.

Price discrimination arises naturally in the theory

of monopoly and oligopoly.

Whenever a good is sold at a price in excess of

its marginal cost, there is an incentive to engage

in price discrimination.

For to say that price is in excess of marginal cost

is to say that there is someone who is willing to

pay more than the cost of production for an extra

unit of the good.

Necessary conditions for price

discrimination

Necessary conditions that must be Fulfilled

are :

(1) The market must be sub-divided into

submarkets with different price elasticities

(2) No reselling can take place from a low-price

market to a high-price market

Example: Electricity, gas (consumed by buyers

and cannot be resold)

Price Discrimination

 Price discrimination is easily controlled by the Monopolist

because he controls the entire supply of a given

commodity

 By selling the quantity at different prices the Monopolist

realizes a higher revenue and hence higher profits than

the revenues he would receive by charging a uniform price

 Price discrimination is a way to extract more surplus from

consumers.

Price Discrimination

Pric

e

Quantity per

week

M D

R

M

C

Q PC

P M

P PC

Q M

DWL

This is consumer surplus from

consumers who buy the good at

P M

.

This is surplus than can be

extracted from selling additional

units at a price < P M

.