What is Price Discrimination
It is Price discrimination when a company charges different price to different consumers for similar products and service, for reasons not related with differences in cost. It should be keep in mind that charging different prices for the associated products or services is not pure price discrimination.
Price discrimination and product differentiation are not the same– differentiation of the product give the company good control over price and the capability to charge consumers a premium price because of valid differences in the quality of a products and service.
Price Discrimination and Consumer Surplus
If a monopolist sells a product at a certain, it doesn’t mean that those who are rich will be unwilling to pay a higher price for the same product. Economists say that such a consumer is enjoying a consumer’s surplus that is a bonus of satisfaction resulting from monopolist’s low price. Clearly this is loss to the monopolist. He can strike a bargain with every customer and improve his profits by selling to different customers at different prices.
Conditions Necessary for Price Discrimination
In order to do this the following conditions must be fulfilled.
It must be possible to keep the market separate by:
Physical barriers as mountains, seas, river, forests
High transport cost
Contractual separation – customers agreeing not to resell in a high price market
- The elasticity of demand in the two markets must be different; high rates of electricity charged to industrial and commercial consumers and low rates to household consumers.
- Tariffs discrimination is possible by keeping home market separate from foreign market by tariffs. Monopoly is maintained by a high tariff on foreign imports.
- The extra output is then exported and sold much cheaper abroad. In order to destroy local industry foreign manufacturers often dump goods at prices below cost of production. The loss is compensated by charging a high price in the home market.