Economics - Price Discrimination - Notes - Economics, Study notes of Economics

Download Economics - Price Discrimination - Notes - Economics and more Study notes Economics in PDF only on Docsity! PRICE DISCRIMINATION Price discrimination, also knows as differential pricing, may be defined as the practice by a seller of charging different prices to the same buyer or to different buyers for an individual product. The main classes of price discrimination are:- (i) First Degree Discrimination. The seller charges the same buyer a different price for each unit bought. E.g., quantity discounts. (ii) Second Degree Discrimination. The seller segregate buyers according to income, geographic location, individual tastes, kinds of uses for the product, and charges different prices to each group or market despite equivalent costs in serving them. As long as the demand elasticities among different buyers are unequal, it will be profitable for the seller to group the buyers into separates classes according to elasticity, and charge each class a separate price. Conditions for Price Discrimination. The main conditions of Price discriminations are:- (i) Multiple Demand Elasticity’s:- There must be difference in demand elasticities among buyers due to differences in income, location, available alternatives, tastes or other factors. (ii) Market Segmentation:- The seller must be able to partition (segment) the total market by segregating buyers into groups according to elasticity. (iii) Market sealing:- The seller must be able to prevent, or natural circumstances must exist which will prevent any significant resale of goods from the lower to the higher price sub-market. Objecti ves. The objectives of price discrimination are: (i) To appropriate the consumer’s surplus so that it accrues to the producer rather than to the consumer. (ii) To dispose of occasional surplus. (iii) To develop a new market. (iv) To make the maximum use of the unutilized capacity. (v) To earn monopoly profits. (vi) To enter into or retain export markets. (vii) To destroy or to forestall competition or to make the competitors amenable to the wishes of the seller adopting price discrimination. It may be called predatory or discriminatory competition. (viii) To raise future sales. This is done by quoting lower rates in the present so that people develop in future a taste for the allied commodities produced by the same manufacturer. VI MONOPOLISTIC COMPETITION Meaning and Nature: Monopolistic competition refers to a market situation in which there are many producers producing goods which are close substitutes of one another. The important distinguishing characteristics of monopolistic competition are, (a) Product Differentiation, (b) existence of many firms supplying the market, and (c) the goods made by them are close substitutes. Price-output Determination under Monopolistic Competition Under monopolistic competition, different firms, produce different varieties of the product. Therefore, different prices for them will be determined in the market depending upon their respective demand and cost conditions. Each firm under monopolistic competitions seeks to achieve equilibrium or profit-maximizing position as regards (1) price and output, (2) product adjustment and (3) adjustment of selling costs. In other words, the producer, under monopolistic competition, must make optimal adjustments not only in the price charged and as regards the quantity of output sold but also in the design of the product and the way in which he promotes the sales. Short-run Equilibrium The firms under monopolistic competition can earn only normal profits in the long run. This is because we assume that entry is free and new firms will enter the industry, if the existing firms are making supernormal profits. As new firms enter and start production, supply will increase and the price will fall, i.e., average revenue curve faced by the firm will shift to the left, and therefore, the supernormal profits will be competed away and the firms will be earning only normal profits. In, the long run, firms which are realizing losses, will leave the industry so that the remaining firms will be earning normal profits. Another point which is to be noted in this context is that average revenue curve in the long run will be more elastic, due to large number of available substitutes. Hence, in the long run, equilibrium is established when firms are earning only normal profits. Therefore, the equilibrium in the long run under monopolistic competition is when Average Revenue = Average Cost. In Fig. 8, average revenue curve (AR) is a tangent to the average cost curve (LAC) at P. Hence, the equilibrium output in the long run is OM and the corresponding price is MP. At this point, average cost and average revenue is MP. Therefore, there are only the normal profits which form part of the cost of production. Thus in the long run, the firm is in equilibrium when output is OM, and the price is MP. Y LMC LAC P P AR MR 0 M OUTPUT X Fig. 8 Equilibrium Under Monopolistic Competition: Long Run R E V E N U E \C O S T