UNIT-3 PRICE DISCRIMINATION

1. UNIT-3 PRICE DISCRIMINATION KISHAN BADIYANI

2. PRICE DISCRIMINATION: Price discrimination means charging different prices from different customers or for different units of the same product. In the words of Joan Robinson: “The act of selling the same article, produced under single control at different prices to different buyers is known as price discrimination.” Price discrimination is possible when the monopolist sells in different markets in such a way that it is not possible to transfer any unit of the commodity from the cheap market to the dearer market. KISHAN BADIYANI

3. PRICE DISCRIMINATION: Price discrimination is, however, not possible under perfect competition, even if the two markets could be kept separate. Since the market demand in each market is perfectly elastic, every seller would try to sell in that market in which he could get the highest price. Competition would make the price equal in both the markets. Thus price discrimination is possible only when markets are imperfect. KISHAN BADIYANI

4. CONDITIONS FOR PRICE DISCRIMINATION (WHEN IT IS POSSIBLE?): 1. Market Imperfections 2. Agreement among Rival Sellers 3. Geographical or Tariff Barriers 4. Differentiated Products 5. Ignorance of Buyers 6. Artificial Differences between Goods 7. Differences in Demand KISHAN BADIYANI

5. WHEN PRICE DISCRIMINATION BECOMES PROFITABLE?: 1. Elasticities of Demand Must be Different: Elasticity of demand for the monopoly product in different markets must be different. Market which is insensitive to price changes or relatively less elastic (but not inelastic) must have a price greater than the market in which demand is relatively more elastic. If elasticities of demand for the monopoly product in two markets are same (i.e., iso-elastic) then uniform price would prevail. Thus, for profitability of a discriminating monopolist, what is required is the difference in elasticities of demand. KISHAN BADIYANI

6. WHEN PRICE DISCRIMINATION BECOMES PROFITABLE?: 2. Marginal Revenues must be the Same: Price discrimination will be profitable only when marginal revenues in different markets are the same. It is true that as these two markets have different demand curves- implying different values of elasticities of demand—marginal revenues may not be the same. However, the monopolist can increase his total revenue by transferring his product from the market that has lower marginal revenue to the market that has higher marginal revenue. When the process of transfer of a commodity from one market to another market brings about an equality in marginal revenues of the two markets, price discrimination becomes profitable. KISHAN BADIYANI

7. MONOPOLISTIC COMPETITION KISHAN BADIYANI

8. MONOPOLISTIC COMPETITION: Monopolistic Competition refers to the market situation in which there is a keen competition, but neither perfect nor pure, among a group of a large number of small producers or suppliers having some degree of monopoly because of the differentiation of their products. Thus, we can say that monopolistic competition (or imperfect competition) is a mixture of competition and a certain degree of monopoly, on the basis of a correct appraisal of the market situation. KISHAN BADIYANI

9. MONOPOLISTIC COMPETITION: 1. Monopolistic Competition refers to competition among a large number of sellers producing close but not perfect substitutes for each other. 2. According to Prof. Lerner – “The condition of imperfect competition arises when a seller has to face the falling demand curve.” KISHAN BADIYANI

10. MONOPOLISTIC COMPETITION: 3. According to Prof. J. K. Mehta – “It has been more fully realised that every case of exchange is a case of what may be called partial monopoly and partial monopoly is looked at from the other said a case of imperfect competition. There is a blending of both competition element and monopoly element in each situation.” 4. According to Prof. Leftwich – “Monopolistic Competition (or imperfect competition) is that condition of industrial market in which a particular commodity of one seller creates an idea of difference from that of the other sellers in the minds of the consumers.” KISHAN BADIYANI

11. CHARACTERISTICS: 1. Less Number of Buyers and Sellers 2. Difference in the Quality and Shape of the Goods 3. Lack of Knowledge on the Part of Consumers 4. High Transportation Cost 5. Advertisement 6. Ignorance of the Buyers 7. Differences in the Establishment of Industry KISHAN BADIYANI

12. MC ATC Profit EQUILIBRIUM OF FIRM UNDER MONOPOLISTIC COMPETITION IN SHORT RUN: Firm Makes Profit Price Price ATC Demand MR KISHAN BADIYANI Quantity 0 Profit- maximizing quantity

13. EQUILIBRIUM OF FIRM UNDER MONOPOLISTIC COMPETITION IN SHORT RUN: • These profits will not last either. • Profits encourage new firms to enter the market. • This reduces the demand faced by incumbent firms • Incumbent firms’ demand curves shift to the left. • Their profits fall… KISHAN BADIYANI

14. MC ATC EQUILIBRIUM OF FIRM UNDER MONOPOLISTIC COMPETITION IN SHORT RUN: Firm Makes Normal Profit Price Price = ATC Zero profit Demand MR Quantity 0 Profit- KISHAN BADIYANI maximizing quantity

15. MC ATC Losses Average total cost Price Demand MR Loss- minimizing quantity EQUILIBRIUM OF FIRM UNDER MONOPOLISTIC COMPETITION IN SHORT RUN: Firm Makes Losses Price Quantity 0 KISHAN BADIYANI

16. EQUILIBRIUM OF FIRM UNDER MONOPOLISTIC COMPETITION IN SHORT RUN: • These losses will not last. • Losses force some incumbent firms to exit the market. • This will increase the demand faced by the remaining firms • Their demand curves will shift to the right. • Their losses will shrink • In the long run, profits will be zero! KISHAN BADIYANI

17. MC ATC P = ATC Demand MR Profit-maximizing quantity EQUILIBRIUM OF FIRM UNDER MONOPOLISTIC COMPETITION IN LONG RUN: Price MR = MC 0 KISHAN BADIYANI Quantity

18. EQUILIBRIUM OF FIRM UNDER MONOPOLISTIC COMPETITION IN LONG RUN: • We have seen that in the long run profits cannot be positive or negative. • Therefore, profits must be zero! • Note that P = ATC > MR = MCin long run equilibrium. KISHAN BADIYANI