Question

describe a situation where a seller is using price discrimination
be sure
a. state the product
b. explain how two of the necessary conditions for price discrimination- the firm having market power. and the firm preventing resale are met
c.explain how different types of people pay different prices for same product.
d. indicate the degree of price discrimination

Answer 1

The situation we will be talking here about is the Indian Railways being the perfect example of monopoly(in India) with full market share and exercising market power where different prices can be charged from different people(price discrimination).

It exists when the sales of the identical goods or services are transacted at different prices from the same provider.

Following are the few factors that enable Indian railways to engage in price discrimination

1. It uses the tactic of market segmentation, and fulfills this objective based on various factors like age, sex, job type etc.
2. The services of Indian railways are not resalable and thereby restricts its discount customers from becoming resellers and get benefit from arbitrage.
3. Price discrimination exists when the sales of the identical goods or services are transacted at different prices from the same provider. Indian railway enjoys some part of the consumer surplus by employing the different methods of price discrimination.

Degrees of Price Discrimination used by IR.

First degree price discrimination - in first degree price discrimination, price varies by customer's willingness or ability to pay. This type of discrimination aims to extract from each customer whatever he/she is willing to pay and hence theoretically complete consumer surplus is available to the producere Indian railways are planning to have online auctions of the freight capacity. It will allow better utilization of freight capacity and boost revenues.

Second degree price discrimination: In second degree price discrimination, price varies according to quantity sold. Usually monopolist sets the price of each block, under which prices are highest for first block of quantity bought and it is reduced for each successive purchase by the same customer.

Third degree price discrimination: In third degree of price discrimination, price generally varies by attributes such as location of purchase, customer segment etc. Indian railways heavily exploits third degree of price discrimination. Indian railways segment its customers by age, thereby segmenting them in different groups.