subject: Price Discrimination [print this page] Price Discrimination Price Discrimination
Price discrimination is the situation where a firm sells the same product with same cost of production at different prices in the different markets.
Price differentiation means charging high prices for the product whose cost of production is high than those products whose cost are lower.
The condition for price Discrimination is that the firm must be price maker firm that is Monopoly firm. Firm must be able to keep the two markets separate mean no resale from low price market to high price market and lastly different markets have different Price elasticity of demand.
Only Monopolies can do price discrimination. Monopoly means single seller selling unique product with no close substitute. Monopolies may be price maker or quantity seller but not both at the same time.
Firm can do price discrimination with respect to age, charge full fare of train or plane from young people and half from old people. Sometimes discount will be given on advance booking of ticket for movie or concert; this is price discrimination with respect to time of purchase. Low prices will be charged when buying in bulk, this is price discrimination with respect to quantity. Sometimes firm will charge low prices from domestic user and high prices from commercial user, this is price discrimination with respect to the users
When firm charge high prices of the product in domestic market and sale same product at low price in international market, is called DUMPING or International price discrimination. The reason for dumping is short term recession in domestic market. Due to recession demand for the product fall and producer dump surplus in foreign market at low price. The other reason for dumping is to enter in the export market.
Perfect price discrimination is a situation where a monopolist is able to identify the price; every individual is willing to pay for the product without splitting up the market into two or more groups.Perfect price discrimination occurs when each unit is sold at different prices. In such a case divergence between sale price and marginal revenue (MR) disappear and revenue generated from selling extra unit is equal to the sale price charged.
