In a Monopoly, a single seller controls the entire market, and because there are no competitors, the firm has complete control over pricing. However, instead of charging a single price for all consumers, a monopolist often charges different prices to different buyers for the same product or service. This practice is called Price Discrimination.
Definition:
According to Prof. A.C. Pigou, price discrimination occurs when a producer sells the same commodity at different prices to different buyers for reasons not related to cost differences.
Why Do Monopolists Engage in Price Discrimination?
A monopolist implements price discrimination to:
✔ Maximize Profits – By charging different prices to different consumer groups, firms extract the maximum willingness to pay.
✔ Utilize Market Segmentation – Different consumers have different demand elasticities, meaning they’re willing to pay varying prices.
✔ Increase Output and Revenue – Lower prices attract more buyers, expanding the market.
Conditions for Price Discrimination
Not all Monopolists can engage in price discrimination. For it to be effective, three conditions must be met:
1️⃣ The Market Must Be Divisible:
- The monopolist must be able to separate consumers into distinct groups.
- Example: Airlines categorize travelers as business-class and economy-class passengers.
2️⃣ No Resale Should Be Possible:
- If a consumer who buys at a lower price can resell to others, price discrimination collapses.
- Example: A student buying a discounted train ticket should not be able to transfer it to a regular traveler.
3️⃣ Different Elasticities of Demand:
- Consumers must have different price sensitivities (elasticities).
- Example: Patients needing life-saving drugs have inelastic demand, while those buying luxury goods are more price-sensitive.
Types of Price Discrimination
Economists categorize price discrimination into three degrees based on how the seller sets different prices.
First-Degree Price Discrimination (Personalized Pricing)
✔ Also known as "Perfect Price Discrimination".
✔ The monopolist charges each consumer the maximum price they are willing to pay.
✔ This allows the firm to extract all consumer surplus, turning it into extra revenue.
Example:
A doctor charges different consultation fees based on the patient’s economic background—charging a rich patient ₹1000 and a poor patient ₹200.
Second-Degree Price Discrimination (Quantity-Based Pricing)
✔ Price varies based on the quantity purchased rather than the consumer’s identity.
✔ Larger quantities have lower per-unit prices.
Example:
Electricity Billing:
- Up to 100 units → ₹5 per unit
- 100-200 units → ₹4 per unit
- Above 200 units → ₹3 per unit
Wholesale Discounts:
- Buying 1 unit = ₹100
- Buying 10 units = ₹80 per unit
Third-Degree Price Discrimination (Market-Based Pricing)
✔ Consumers are divided into distinct groups based on identifiable characteristics, and each group is charged a different price.
✔ The firm recognizes that different groups have different demand elasticities.
Examples:
- Movie Theaters: Charge lower prices for students and senior citizens, higher for regular adults.
- Railways: AC class tickets are more expensive than sleeper class.
- Pharmaceutical Companies: Sell medicines at different prices in different countries.
Real-World Examples of Price Discrimination
| Industry | Type of Price Discrimination | Example |
|---|---|---|
| Airlines | Third-degree | Business-class vs. economy-class pricing |
| Telecom Services | Second-degree | Data plans with different pricing per GB |
| Hotels | Third-degree | Higher prices during peak seasons |
| Online Shopping | First-degree | Personalized pricing based on browsing history |
| Education | Third-degree | Tuition discounts for students from low-income backgrounds |
Advantages and Disadvantages of Price Discrimination
✅ Benefits for the Monopolist
✔ Higher Profits: Extracts more consumer surplus.
✔ Efficient Resource Allocation: Ensures full market demand is met.
✔ Subsidizing Poor Consumers: Enables lower-income groups to access goods/services.
❌ Drawbacks for Consumers
❌ Unfair Pricing: Some consumers end up paying more for the same product.
❌ Monopoly Power Abuse: Monopolists can exploit market control.
❌ Reduces Consumer Surplus: Buyers lose bargaining power.
For a third-degree price-discriminating monopolist, we can represent the pricing in two markets with different elasticities:
1️⃣ Inelastic Market (e.g., Business Class Travelers) → Higher price, lower quantity.
2️⃣ Elastic Market (e.g., Students) → Lower price, higher quantity.
- The monopolist equates MR = MC in each segment.
- A higher price is set in the inelastic market.
- A lower price is set in the elastic market.
💡 Price discrimination is a double-edged sword. While it helps monopolists maximize profits and even benefits lower-income groups in some cases, it can also lead to exploitation. In regulated sectors like pharmaceuticals and public utilities, governments intervene to ensure fairness.