Price discrimination with graphical representation

managerial economics; pricing practices

1. Jyothi s, Assistant Professor, GFGCW, Holenarasipura . ARTHADHARE

2. PRICING PRACTICES Price Discrimination Jyothi s, Assistant Professor, GFGCW, Holenarasipura .

3. Contents : Meaning Necessary Conditions First Degree Price Discrimination second Degree Price Discrimination Third-degree price Discrimination

4. Meaning: Price Discrimination refers to the charging of different prices for different quantities of a product , at different times , to different customer groups of in different markets, when these difference are not justified by cost differences. Example : Electricity suppliers charge Higher prices to business than to households.

5. Conditions: Three conditions must be met for a firm to be able to practise Price Discrimination : 1 . The firm must have some control over the price of the product . (i.e., the firm must be an imperfect competitor.)

6. 2 . The price elasticity of demand for the product must differ for different quantities of the product , at different times, for different customer groups, or in different markets.

7. 3 . The quantities of the product of service , the times when they are used of consumed , and the customer groups of markets for the product must be separable (i.e., the firm must be able to segment the market).

8. Degree of Price Discriminations : Prof. A.C. Pigou has given the following three degrees of discriminating monopoly: Price Discrimination of first degree Price Discrimination of second degree Price Discrimination of third degree

9. First-Degree Price Discrimination : First-degree price discrimination involves selling each unit of the product separately and charging the highest price possible for each unit sold . The firm extracts all of the consumers’ surplus from consumers and maximizes the total revenue and profits from the sale of a particular quantity of the product.

10. First and second Degree Price Discrimination Graphically: 6 5 4 3 2 1 - - - - - - A - 10 20 30 40 50 60 B C D H G K J F Price Quantity Consumer surplus = ACG

11. In the absence of first-degree price discrimination, however, the firm will charge the price of ₹2 for all the 40 units of the product and receive a total revenue of only CF0G = ₹80.The difference between what consumers are willing to pay (ACF0 = ₹160) and what they actually pay (CF0G = ₹ 80) is the consumers’ surplus (triangle ACG = ₹80).

12. Second-Degree Price Discrimination: Second-Degree Price Discrimination is more practical and common. This refers to the charging of a uniform price per unit for a specific quantity or block of the product sold to each customer, a lower price per unit for an additional batch or block of the product. By doing so, the firm will extract part, but not at all, of the consumers’ surplus.

13. Second degree price discrimination is often used in the pricing of electric, gas, water, and other public utilities; in the renting of photocopying machines ; in the use of computers ; and so on.

14. S econd Degree Price Discrimination Graphically: 6 5 4 3 2 1 - - - - - - A - 10 20 30 40 50 60 B C D H K J F Price Quantity Consumer surplus = BKGH G

15. Suppose that the firm of above figure sets the price of ₹4 per unit on the first 20 units of the product and the price of ₹2 per unit on the next batch of 20 units of the product. The total revenue of the firm would then be BJ0H = ₹80 from the first batch of 20 units of the product and CFJK = ₹40 from the next batch of 20 units, for overall total revenue of ₹120. thus, the firm can extract one-half or ₹40 (BKGH)of the total consumers’ surplus.

16. Third-degree Price Discrimination: Third-degree Price Discrimination refers to the charging of different prices for the same product in different markets until the marginal revenue of the last unit of the product sold in each market equals the marginal cost of producing the product.

17. If the firm sells a product in two markets, the firm will maximize its total profits by selling the product in each market until MR 1 = MR 2 = MC . The firm to be able to practice this or any other type of price discrimination, the firm must have some monopoly power . The price elasticity of demand for the product must be different in the different markets , and the markets must be separable .

18. Third-degree Price Discrimination Graphically : Higher price in the less elastic Market Lower price in more elastic market Third-degree price Discrimination

19. References: Managerial Economics, principles and worldwide applications, eighth edition(2019) , Dominick salvatore , siddhartha K.Rastogi . Modern Microeconomics,second edition(2017) A.Koutsoyiannis . Advanced economic theory: Microeconomic analysis, Nineteenth edition, H.L.Ahuja . Various Online sources.