Price Discrimination

Price Discrimination

Price Discrimination, varying the prices of a commodity or service in different markets according to the elasticity of demand in each. For example, a barrister or doctor may charge according to 'what the traffic will bear': more wealthy clients and customers are charged more than the less wealthy. Price discrimination is possible when the entrepreneur is a monopolist (or when there is collusion among sellers to discriminate in price) and when consumers cannot move from one market to another or buy in one market and resell in another. When there are many sellers consumers will tend to transfer from one to another if they can buy more cheaply. The same commodity may be sold at different prices because consumers do not know that others are getting it more cheaply. Discrimination may occur in the sale of direct personal services, e.g. medical or legal, because they cannot be resold. Distance (because of costs of transport) and frontier barriers (e.g. tariffs) are other masons for the existence of separate markets for the same commodity. The monopolist may take advantage of the protection offered by a tariff and sell at a higher price in the home market. In the world market his price will be lower because he is faced with competition from other sellers.

Price discrimination is profitable only when the conditions of demand in the markets are different. If the elasticity of demand in two markets is identical, the monopolist will not find it profitable to charge different prices. A unit of output produced at a given cost transferred from one market to the other will result in a loss of revenue in the first market equal to the increase in revenue in the second; so there is no advantage. If the elasticities of demand differ, the monopolist will charge more where the demand is less elastic, and less where demand is more elastic, so that the increases in revenues in both markets are equal to each other and to the marginal cost of producing the commodity or service.

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