Page 262 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-13: Theory of Monopoly Firm

13.9 Essential Conditions for Price Discrimination Notes

Price discrimination is possible when the following conditions are fulfilled in the market—
1. Existence of Monopoly Power: First condition of price discrimination is that seller must be a
monopolist that means he must possess the power of monopoly. In the absence of monopoly power
seller cannot charge more price in comparison to other sellers. The perfect competitive firms cannot
charge one price for homogenous product because as per the perfect competition, there is a nature
for a single price in market.
2. Separate Markets: One condition is necessary for discriminating monopoly is that there must be
two or more markets which can be separated and can be kept separate. Markets can be kept separate
according to geographical point of view, or by brand, or by time. Persons providing personal services
like doctors, lawyers etc. can charge different prices for the same service.
3. Difference in the Elasticity of Demand: Price discrimination is possible when the elasticity of demand
available in different markets will be different. If this happens then monopolist will determine more
prices in the inelastic market, whereas he will determine fewer prices in the market of more elastic in
demand. In this way he can increase his total income because there is no fear in the alteration of demand.
If the elasticity of demand in different market is equal then doing price discrimination is impossible.
4. No Possibility of Resale: For the existence of price discrimination it is necessary that the primary buyer
of any goods or services should not be able to resale that product. It is only possible, when in one side,
unit of goods would not be transfered from cheap market to expensive market, and on the other side
buyers must not be able to move from expensive market to cheap market. If it happens then goods will
be bought from cheap market and then it will be re-sold at expensive market, with this, the difference will
be vanished which a monopolist wants to continue. That is why it is necessary for price discrimination
that the unit of good must not transfer from a cheap market to a costly market. According to Lipsey,
“The key to being able to disseminate among buyers is that discrimination among buyers requires that
the goods cannot be resold by the buyer who faces the low price to the buyer who faces the high price.”
In summary, price discrimination can only be possible when one unit of goods cannot be transfered from
cheap market to expensive market, and the elasticity of demand must be different in different markets.

13.10 When Price Discrimination is Profitable

Price discrimination is profitable when the price elasticity of demand is different in different markets.
If the price elasticity of demand in two markets is equal, the monopolist will not gain any profit in
these two markets by price discrimination. The reason behind is when price elasticity of two markets is
equal then the marginal revenue will also be equal. In opposite if price elasticity of markets is different,
then the marginal revenue will also be different. In opposite if demand of elasticity is different in two
markets then the marginal income would be different for goods too. The marginal income will high in
a market while low in another. In this situation selling of goods at different prices by taking it out from
a market of low marginal revenue to a market of high marginal revenue will be profitable. In this way
due to difference in price elasticity of demand in two markets, price discrimination will be profitable.
This fact can be explained with the help of following equation—
)
_____

MR = AR ( E – 1

E
Suppose that monopolist price in market A and B is equal to 10. If at this equal monopolist price the
elasticity of demand in market A and B is step 2 and 5 then according to above equation the idea of
gained marginal price in these markets can be drawn by the following way -
2 – 1
E – 1 ) _____ ) 1 __
_____
Marginal Revenue (MR ) in market A = AR ( = 10 ( = 10 ( ) = 5

A E 2 2
E – 1
4 __
_____

Marginal Revenue (MR ) in market B = AR ( _____ ) = 10 ( 5 – 1 ) = 10 ( ) = 8

B E 5 8
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