DISCRIMINATING MONOPOLY

·         DISCRIMINATING MONOPOLY

·         MONOPOLY

·         MICRO ECONOMICS

·         BY DR. SHASHI AGGARWAL

·                 PRICE DISCRIMINATION/DISCRIMINATING MONOPOLY

1.    A MONOPOLIST OFTEN CHARGES DIFFERENT  PRICES OF THE SAME PRODUCT FROM DIFFERENT CUSTOMERS OR DIFFERENT INDUSTRIES

2.    IT IS CALLED PRICE DISCRIMINATION

3.    DISCRIMINATING MONOPOLIST ADOPTING THIS POLICY OF CHARGING DIFFERENT PRICES OF SAME PRODUCT

4.    J.S.BAINS,” PRICE DISCRIMINATION REFERS STRICTLY TO THE PRACTICE BY A SELLER TO CHARGING DIFFERENT PRICES FOR DIFFERENT BUYERS FOR THE SAME GOODS.

·                 KINDS

1.    PERSONAL PRICE DISCRIMINATION

2.    GEOGRAPHICAL PRICE DISCRIMINATION

3.    PRICE DISCRIMINATION ACCORDING TO USE

·                 PERSONAL PRICE DISCRIMINATION

1.    CHARGING DIFFERENT PRICES FROM DIFFERENT CUSTOMERS FOR THE SAME PRODUCT

2.    BECOMES POSSIBLE BECAUSE OF THE IGNORANCE OF THE CONSUMER,LITTLE DIFFERENCE IN THE NATURE OF GOODS AND SERVICES

3.    DOCTOR CHARGES DIFFERENT FEES FOR THE SAME TYPE OF OPERATION FROM RICH AND POOR

·                 GEOGRAPHICAL PRICE DISCRIMINATION

1.    CHARGES DIFFERENT PRICES IN DIFFERENT ARES FOR THE SAME PRODUCT

2.    WHERE SUBSTITUTES ARE AVAILABLE THEN LESS PRICE

3.    WHERE SUBSTITUTES ARE NOT AVAILABLE THEN HIGH PRICE

4.    WHERE DEMAND IS  INELASTIC HIGH PRICE AND WHERE DEMAND IS MORE ELASTIC LOW PRICE

·                 PRICE DISCRIMINATION ACCORDING TO USE

·                 DIFFERENT PRICE FOR DIFFERENT USE OF THE PRODUCT. DOMESTIC USE RATE OF ELECTRICITY IS DIFFERENT FROM COMMERCIAL USE.

·                 DEGREES OF PRICE DISCRIMINATION

·                 FIRST DEGREE PRICE DISCRIMINATION : WHEN BUSINESS CAN ACCURATELY DETERMINE WHAT EACH CUSTOMER IS WILLING TO PAY FOR SPECIFIC PRODUCT /OR SERVICE AND THEN SELLING A PRODUCT OR SERVICE AT THAT PRICE

·                 SECOND DEGREE PRICE DISCRIMINATION :-OCCURS WHEN A COMPANY CHARGE DIFFERENT PRICE FOR DIFFERENT QUANTITIES CONSUMED SUCH AS QUANTITY DISCOUNT ON BULK PURCHASE

·                 THIRD DEGREE PRICE DISCRIMINATION WHEN A COMPANY CHARGES A DIFFERENT PRICE TO DIFFERENT CONSUMER GROUPS.

·                 CONDITIONS

•                          EXISTENCE OF MONOPOLY :POSSIBLE UNDER CONDITIONS OF MONOPOLY

1. SEPARATE MARKET :NECESSARY FOR DISCRIMINATING MONOPOLY THERE MUST BE TWO OR MORE MARKETS WHICH CAN BE SEPARATED AND CAN BE SET SEPARATE. UNITS OF DEMAND SHOULD NOT MOVE  FROM ONE MARKET TO OTHER MARKET
2. DIFFERENCE IN THE ELASTICITY OF DEMAND: POSSIBLE WHEN DEMAND ELASTICITY IS DIFFERENT IN DIFFERENT MARKET
3. EXPENDITURE IN DIVIDED AND SUB DIVIDING THE MARKET TO BE MINIMUM
4. PRODUCTION OF COMMODITY TO ORDER: IF A CONSUMER MADE TO ORDER,THEN IT IS POSSIBLE FOR THE PRODUCER OR SELLER TO PRACTICE PRICE DISCRIMINATION
5. LEGAL SANCTION: LEGALLY SANCTIONED.
6. PRODUCT DIFFERENTIATION : BY CHANGING PACKING,NAME AND LABELLING CAN CHARGE DIFFERENT PRICES
7. CONSUMER BEHAVIOUR

·                 PROFITABILITY OF PRICE DISCRIMINATION

·                 WHEN THE PRICE ELASTICITY IS DIFFERENT  IN DIFFERENT MARKET.

·                 IF PRICE ELASTICITY OF DEMAND IN TWO MARKETS IS SAME ,THEN PRICE DISCRIMINATION WILL NOT BE PROFITABLE. BECAUSE MARGINAL REVENUE OF THE PRODUCT IN BOTH MARKET WILL BE EQUAL.

·                 IF PRICE ELASTICITY IS DIFFERENT,IN ONE MARKET MORE ELASTIC AND IN OTHER MARKET IT IS LESS AND MARGINAL REVENUE WILL BE DIFFERENT IN BOTH MARKET

·                 IT WILL BE MORE IN ONE AND LESS IN OTHER MARKET ( MR)

·                 IT WILL BE PROFITABLE TO TRANSFER THE COMMODITY FROM LESS MARGINAL REVENUE TO MORE REVENUE. AND  DIFFERENCE IN ELASTICITY WILL MAKE THE PRICE DISCRIMINATION PROFITABLE.

·                 MR =AR( E-1/E)

·                 PRICE AND OUT PUT DETERMINATION /EQUILIBRIUM UNDER DISCRIMINATING MONOPOLY

·                 THE AIM OF MONOPOLIST IS TO INCREASE TOTAL REVENUE AND PROFIT

·                 A SITUATION OF PRICE DISCRIMINATION IN WHICH A MONOPOLIST BY SELLING A PRODUCT AT DIFFERENT PRICES POCKETS A PART OF CONSUMER’S SURPLUS.

·                 PIGOU CALL IT THIRD DEGREE OF PRICE DISCRIMINATION.

·                 THE CONDITION OF MR=MC WILL BE APPLIED IN EACH MARKET.

·                 DISCRIMINATING MONOPOLIST HAS TO DECIDE ABOUT TOTAL OUTPUT TO BE PRODUCED AND HOW MUCH OF THE OUTPUT TO BE SOLD IN DIFFERENT MARKET AND AT WHAT PRICE TO GET THE MAXIMUM PROFIT,

·                 MR₁=MR₂

·                 MR₁=MR₂ =MC

·                        

·                 EXPLANATION

1.    THE EQUILIBRIUM OF THE MONOPOLY FIRM WILL BE POINT E WHERE AGGREGATE MR IS EQUAL TO MC OF THE TOTAL OUT PUT

2.    THE MONOPOLIST WILL SO DISTRIBUTE HIS TOTAL OUTPUT IN TWO MARKETS THAT MR OF EACH MARKET IS THE SAME. IF HIS MR IS LESS ON ONE MARKET  AND MORE IN OTHER MARKET

3.    IT WILL BE PROFITABLE FOR HIM TO TRANSFER COMMODITIES FROM LESS TO MORE MR

4.    EQUILIBRIUM WILL WHERE MARGINAL COST OF TOTAL OUTPUT IS EQUAL TO COMBINED MARGINAL REVENUE OF BOTH THE MARKET AND MARGINAL REVENUE OF BOTH THE MARKET IS EQUAL TO MARGINAL COST OF TOTAL OUTPUT

·                 BENEFICIAL EFFECT

1.    BENEFICIAL TO THE POOR WHEN MONOPOLIST CHARGES HIGH PRICE FROM THE RICH CUSTOMER AND FIX THE LOW PRICE FOR THE POOR

2.    PUBLIC UTILITY SERVICES :-SERVICES OF RAILWAYS DEPARTMENT

3.    FULL UTILIZATION OF RESOURCES :DUMPING AS A FORM OF PRICE DISCRIMINATION CAN BE BENEFICIAL FOR SOCIETY. BY SELLING GOODS CHEAP THE PRODUCERS CAN MAKE USE OF THEIR EXCESS CAPACITY.

·                 HARMFUL EFFECT

·                 NO PROPER USE OF FACTOR OF PRODUCTION AS MONOPOLIST WILL PRODUCE THOSE GOODS LIKE LUXURY WHERE HE COULD EARN MORE PROFITS

·                 INTENTIONALLY PRODUCES LOW TO HAVE MORE PROFIT