Question

2. Why does a price-discriminating monopolist earn more profit than a monopolist who does not price-discriminate? What must a monopolist do in order to successfully price discriminate? Give three real world examples of price discrimination practices.

Answer 1

If the seller is charging different prices for the same good or service then it is known as price discrimination. In order to practice price discrimination the seller must be able to differentiate market segments and the price elasticity of each market segment should be different. In a monopoly the marginal revenue function slopes downwards in all the market segments. Now a monopolist who does not price discriminate will have the same marginal revenue in all the market segments with different price elasticities. But if the monopolist discriminates price then the market segment with relatively inelastic demand will be charged a higher price and the market segment with a relatively elastic demand will be charged a lower price.The firm can then increase its total revenue by selling more in the market segment where the price and MR is higher and selling less in the market segment where the price and MR are lower.

In order to successfully price discriminate the monopolist must take the following steps:

1. The monopolist must identify different segments of the market.

2. He must ensure that these different market segments have different price elasticities of demand.

3. These different market segments must be kept separate, either by nature of use, time or physical distance.

4. There must be no transfer of goods or services between the two markets. The monopolist should make sure that the consumer does not purchase at a lower price in the elastic sub market and then resell it at a higher price in the inelastic submarket.

5. The monopolist should be able to exercise its monopoly power.

The real world examples of price discrimination practices are:

1. Students and senior citizens get discounts on travelling by air or railways.

2. If you prove that you belong to a low income group then you are offered a fees waiver or discount on fees in colleges.

3. During ladies night in a pub women get drinks at a discounted rate whereas men have to pay the full price for the same drink.