Question

Are monopolies indefinitely bad for society? As a price setter, how will a monopolist determine price? Provide specific examples of price discrimination that you have encountered. Do you believe price discrimination is fair?

Answer 1

Hello!

A monopoly arises when a business has the exclusive right of providing the particular good or service. Monopolies arise because of several reasons like natural monopoly (cost efficiency), government regulation, IPR, etc. A monopoly is considered bad because a monopolist has the right to set the price since he/she is the only one suppling that product in the market. Also, sometimes monopoly gives little incentive to innovate the product as there is a lack of close subsitutes.
A monopoly is not bad for the society is every case and therefore not indefinitely bad. Sometimes there is a need for monopoly in some goods and services. It is economically advisable in areas where prices have to be regulated for the public, entry and exit cost of a particular industry is too high for companies, or perfect competition is inefficient. For example, electrical and water utilities. It is very expensive to build new dams or electric plants. In this case, the government takes incharge or such public goods and provide them at a cheaper rate to make it affordable for all and also to maintain the consistent supply. It becomes necessary to protect the consumer in such cases.

Determination of Price by a Monopolist:

Generally, in a market, a price is determined when supply and demand function of a particular product intersects. But, in a monopoly, there is no supply curve as the monopolist first decides the price at which the profit is maximised and then accordingly sets the supply. Therefore, the monopolist sets the price at a point when its marginal revenue equates the marginal cost. At this point of intersection, the monopolist looks at the demand curve to determine the price for this quantity. At a point below MR=MC, the marginal revenue from each additional unit is greater than the marginal cost and therefore the monopolist has an incentive to produce more due to increasing profits. At a point beyond MR=MC, the marginal cost is greater than the marginal revenue and therefore the monopolist doesn't produce any further. It stays at this point of maximum profit and determines the price through demand curve.



Price Descrimination is a market strategy where different prices are charged from different customers for the same product based on their willingness to pay and their price elasticity of that product.

Some Specific Examples of Price Descrimination:

1. Getting increased prices for the same Airline flight while booking few days before the travel date rather than booking a month or two in advance. Also, prices are higher in holiday seasons for the same flight.
2. Getting gender specific discounts at bars and restaurants on Saturday nights for women.
3. Getting more coupons to provide an incentive to purchase when the company feels that we are more price senitive consumer.
4. Also seeing discount offers like buy one for 99 bucks and three for 199 bucks which target the price differentiation based on the volume that the consumer purchases.

Price Discrimination is fair in economical sense. It allows companies to sell their products at a lower price in poor countries or poor consumers while selling the same product at a slightly higher price in rich countries who have greater willingness and ability to pay. This is important because it allows the company to stay in profit while making it available to diverse group of customers or while making it affordable for all. For example, some publishers sell their books at a cheaper price in poor countries and at a slightly higher price in rich countries, making their books available worldwide. Price descrimination also allows the good to be available at the urgent basis at a slightly higher price. This provides an advantage for the customers who are far sighted and punctual while making the purchases. This happens a lot while booking flight and train tickets.
As a consumer, it always feels unfair to be charged extra for the same product. If the consumers get to know about the price differentiation strategy of the company, then this could form a bad image of the company in the market. Therefore, price differentiation strategy needs to be carefully planned and implemented, specially when it is indirect.

Hope you understood!:)