Often do we come across situations when we find that a single producer sells his product at different prices to different buyers or in different markets. This practice of charging different prices to different buyers or in different markets for the same product is called Price discrimination.
According to British economist Joan Robinson, “the act of selling the same article, produced under a single control, at different prices to different buyers is called Price discrimination.”
The person or firm practicing price discrimination is the Discriminating Monopolist. Price discrimination may take any of these three forms :
- Personal Price-discrimination: i.e. different prices may be charged to different buyers for the same product, may be depending upon the individuals ability to pay.
- Regional Price-discrimination: i.e. different prices may be charged for the same product in different local markets. Local or regional price-discrimination depends on the differences in elasticities of demand for the product in different markets.
- Trade Price-discrimination: i.e. different prices may be charged for the same product depending upon the use to which the product is applied. e.g. a relatively lower price is charged for a unit of electricity when used for industrial consumption purpose as compared to the price charged for the same unit of electricity for the purpose of domestic consumption.
Price-discrimination is possible under following conditions :
- Imperfect Competition : Price-discrimination is not possible under perfect competition because under perfect competition each firm is a price taker and we also assume perfect knowledge on the part of buyers about market conditions. Hence a producer cannot charge different price for the same product to different buyers. Therefore price-discrimination can only be practiced under imperfect competition.
- Absence of Resale possibility : The fundamental condition which must be fulfilled if discrimination is to take place is that there should be no possibility of resale from one consumer to the other. Now if the same commodity is sold to Mr. A at 10$ and to Mr. B. at 9$ and if the buyers are interrelated then B will buy both the units at the price of 9$ each and resell it to A. In that case the monopolist will not be able to practice price-discrimination.
- Differences in Elasticity of demand : Perhaps the most important factor which promotes price discrimination is the prevalent differences in elasticity of demand for the product. It is due to differences in elasticity of demand for the product displayed by different consumers or in different regional markets that price-discrimination has become possible. In a market where demand for the product is relatively inelastic, the monopolist will charge a relatively higher price.
- Relative immobility of buyers : There should prevail no possibility of transferring the unit of demand from the high priced market to the low priced one or else it will be difficult for the monopolist to practice price-discrimination.
- Personal Services : In case of services which require personal touch and which are not subject to resale it is easy to practice price discrimination e.g. doctors, lawyers, hair-dressers, beauticians, auditors etc. can very conveniently practice price-discrimination.
- Regional distances and frontier barriers : Regional distances account for transport cost and so also inter-regional exchanges involve tariffs and duties. These factors enable the monopolist to charge different prices in different regional markets for the same product and encourage price-discrimination.
- Consumer’s Peculiarities : Price-discrimination takes place due to some of the peculiarities of the consumers:
- Ignorance : The consumer may be ignorant of the price charged by the monopolist for the same product to the other consumers.
- Indifference : The consumers do display the tendency to ignore minor price differences e.g. if Mr A is asked to pay 50$ for the product and Mr. B has paid 51$ then B may not bother much about this price difference. This attitude of indifference with regard to different prices charged for the same product to different buyers encourages the monopolist to practice price-discrimination.
- Illusion : The consumers entertain some false notions. i. e. there is the tendency to believe that different price implies inherent qualitative differences in the product. Such beliefs encourage the policy of price-discrimination.