Question

Explain price discrimination strategy used in Coal or Spectrum licenses and what is the benefit to the government when they sell these licenses to corporate license buyers? (Elaborated answer please)

Answer 1

Price Discrimination

Price discrimination exists within a market when the sales of identical goods or services are sold at different prices by the same provider. The goal of price discrimination is for the seller to make the most profit possible. Although the cost of producing the products is the same, the seller has the ability to increase the price based on location, consumer financial status, product demand, etc.

Price Discrimination Criteria

Within commerce there are specific criteria that must be met in order for price discrimination to occur:

1. The firm must have market power.

2. The firm must be able to recognize differences in demand.

3. The firm must have the ability to prevent arbitration, or resale of the product.

Types of Price Discrimination

In commerce there are three types of price discrimination that exist. The exact price discrimination method that is used depends on the factors within the particular market.

First degree price discrimination: the monopoly seller of a good or service must know the absolute maximum price that every consumer is willing to pay and can charge each customer that exact amount. This allows the seller to obtain the highest revenue possible.

Second degree price discrimination: the price of a good or service varies according to the quantity demanded. Larger quantities are available at a lower price (higher discounts are given to consumers who buy a good in bulk quantities).

Third degree price discrimination: the price varies according to consumer attributes such as age, sex, location, and economic status.

If a corporate wants to get a permission regarding the supply of a product from the government, they need to pay licensing fee to the government.

The term "licensing fee" can be used in several contexts, where it’s most commonly used to describe an amount of money paid to an entity for a certain right or ability. A licensing fee can be an amount of money paid by an individual or business to a government agency for the privilege of performing a certain service or engaging in a specific line of business. So government is getting lot of tangible and intangible advantages through licensing.

KEY POINTS

A licensing fee is a money paid for a right or ability to use a property or asset. Things that can be licensed include software, patents, and copyrighted works.

How a Licensing Fee Works

Many types of professions require licenses to participate in the profession. These licenses are usually issued after a certification examination has been passed or mandatory training hours have been completed. A licensing fee can also describe a sum paid to use a copyrighted item, such as a photograph or logo, that is owned by someone else. Once a professional has their license, they are a licensee.

Licensing fees, combined with the fees to get the training necessary to qualify for the license, create barriers to entry in licensed occupations. So these corporates will efficiently handle the supply of that particular good/ service to the customers.