Price discrimination: types, degrees, examples

Price discrimination: types, degrees, examples
Price discrimination: types, degrees, examples
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A monopoly enterprise can use its position to conduct a pricing policy that is convenient for itself. Such an opportunity appears only in conditions of imperfect competition. In the article, we will understand what kind of "convenient" pricing policy is and how it is applied.

price discrimination

Opportunities in imperfect competition

An enterprise becomes a monopolist if it is the only one in a given territory that produces a unique product that has no substitutes. Using its position in the market, such a company can conduct price discrimination. It is necessary to take into account one nuance. In this context, the term is used purely technically and is not meant to be negative. The concept of discriminatio in Latin means "difference".

Price discrimination practices

First, let's break down the concept. Price discrimination is the setting of different prices for different units of the same product for the same or different consumers.

Please note that the cost of goods does not reflect the difference in the cost of theirtransportation to the buyer or the provision of other services. Therefore, not always the same price indicates the absence of such a policy in the company. Accordingly, not in all cases, the difference in value directly indicates its presence. For example, the supply of the same goods to different regions, of different quality, in different seasons cannot be considered price discrimination. However, the reverse situation also occurs. Supplying consumers in different regions with the same product at the same price can be considered price discrimination.

imperfect competition

Key conditions

Price discrimination is possible in the presence of the following factors:

  • elasticity of demand for products in terms of cost for different consumers is significantly different;
  • customers can be easily identified;
  • No further resale of products.

As practice shows, more favorable conditions for the implementation of discriminatory pricing policy are created in the markets of services or goods. In this case, one important condition must be met. Markets should be far apart or separated by tariff barriers.

Features of the implementation of discriminatory policy

In order for a monopoly enterprise to be able to carry out price discrimination, certain conditions must be created in the market. Specifically:

  1. Consumers should be divided into groups. Buyers whose demand is inelastic will buy products at a high cost, and those whose demandwhich is flexible - by low.
  2. Goods should not be resold by buyers or sellers of one market to consumers or sellers of another. The fact is that the free movement of goods from cheap to expensive segments leads to cost equalization. When establishing a single price for products, discrimination becomes impossible.
  3. Buyers (for a monopoly) or sellers (for a monopoly) must be identifiable (the same). Otherwise, it will be impossible to split the market.

Price discrimination can be carried out on the basis of market differentiation by industry, ownership forms of manufacturing enterprises or consumers. The division is also carried out depending on what the acquired good is - a means of consumption or production.

price discrimination examples

Classification

The term "price discrimination" was introduced into economics by the English economist A. Pigou. However, the phenomenon itself was already known before. Pigou proposed to divide price discrimination into types or degrees. There are three of them in total. Consider separately.

Interpersonal and personal sharing of the cost of demand

With this differentiation, discrimination of the 1st degree occurs. It is observed in those cases when for each unit of a particular good a price equal to the cost of demand is determined. Accordingly, the sale of products for all purchasers is carried out at different prices. This kind of differentiation is called perfect price discrimination.

1st degree price discrimination

The optimal output of a monopoly enterprise is at point L, when the marginal revenue (MC) and maximum cost (MR) curves intersect. It is Q'2 at the cost of P2. Consumers' surplus is equal to area P2AL, and sellers' surplus is equal to area CP2LE2.

The monopoly enterprise appropriates the consumer surplus PAL, which, under perfect competition and volume Q2, would be mastered by buyers.

It must be said that the second degree of discrimination in its pure form is impossible. This is due to the fact that a monopoly enterprise cannot have complete information about the demand functions of the entire number of potential buyers. Some approximation to pure discrimination can occur with a small number of consumers, if each unit of goods is made to order for specific individuals.

types of price discrimination

Second type of discrimination

It occurs when the cost of products is the same for all consumers, but differentiates depending on the volume of purchases. The relationship between the manufacturer's total revenue (buyer's costs) is non-linear. Accordingly, prices are also called non-linear or multi-part tariff.

If this kind of discrimination occurs, the benefits are grouped into specific batches. The company sets different prices for each of them. In practice, this discrimination takes the form of discounts and markups.

Chart example

Assume that a monopoly enterprisedivided the output of goods into 3 batches. Each of them is sold at different prices. Let us assume that the first number of units of goods Q1 is sold at the cost of P1, the next - Q2-Q1 - at the cost of P2, the third - Q3-Q2 - P3.

2nd degree price discrimination

As a result, the total revenue of the company from the sale of Q1 units of goods will be equal to the area (S) of the figure OP1AQ1, from the sale of Q2 - S OP1AKBQ2, and for Q3 - S of the shaded figure. The proceeds from the sale of the third batch at the same cost P3 equals the area OP3CQ3. At the same time, the consumer surplus (figure P3P1AKBL) was appropriated by the enterprise based on discrimination of the 2nd degree.

S of the unshaded triangles below the demand curve is the share of consumer surplus that was not appropriated by the monopolist.

It is not uncommon for 2nd degree discrimination to take the form of discounts or discounts. For example, these could be:

  1. Reduced cost depending on quantity supplied.
  2. Cumulative discounts - seasonal tickets for long-distance trains.
  3. Price discrimination in time - different cost of morning, evening, afternoon sessions at the cinema.
  4. Subscription fee with proportional payment of the entire volume of the purchased good.

Third degree discrimination

It assumes that the good is sold to different buyers at different prices, but at the same time, each unit of production purchased by a specific subject is paid for by him in the same amount.

If during the differentiation of the first two species there was a distributiongoods into groups, here the purchasers themselves are divided. Differentiation is carried out into groups or markets, for which their own selling prices are formed.

3rd degree price discrimination

If we consider discrimination in two markets, then both traffics have a common vertical axis. Marginal cost (MC) is constant. In each market, the monopolist maximizes profits at MR=MC and sets a higher price at which the elasticity of demand for the good decreases.

Differentiation value

Very often Western enterprises use price discrimination. In many cases, it is implemented regularly. Monopoly companies systematize by differentiating consumers according to their preferences, place of residence, age, income, characteristics of work, etc. Accordingly, companies sell their products purposefully based on available data.

price discrimination practices

Usually, discrimination is used in the course of competition to attract additional customers.

Conclusions

Experts and leading economists give a mixed assessment of the consequences of price discrimination. Any differentiation has both positive and negative sides.

The beneficial effect is that discrimination allows sales limits to be extended beyond those normally controlled by the monopolist. If there were no differentiation at all, then certain types of services wouldwould not be provided.

consequences of price discrimination

Negative consequences include non-optimal, irrational from an economic point of view inter-territorial and inter-sectoral redistribution of resources.

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