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Price Discrimination
By Philip Fitzpatrick.

• Price Discrimination is defined as the selling
of the same good (or service) to different
customers at different prices, where such
price differences are not caused by
differences in cost.

• All price differences are not a result of price
discrimination. Eg, a producer will usually
charge more for a good sold in a distant
market than in a nearby market. This is not
price discrimination because it costs more to
transport the good and sell it in the distant
market than it does to sell the same good in
the nearby market.

There are two types of Price Discrimination:

1.Sale of identical goods (or services) to
different customers at different prices.
Examples:
• A doctor may charge a rich patient 30 euro
for a consultation, while a poor person may
be charged 15 euro for the same service,
• Old age pensioners are sometimes offered
services at reduced rates, Eg dry cleaning and
hairdressing.
In the above examples, the underlying feature is that the seller (or
producer) charges higher prices for the same good to those
customers perceived to be in the best position (ie willing and/or
able) to pay such prices, and lower prices to those customers whose
demand is not seen as strong.

2. Sale of different quantities of a good (or
service) to same consumer at different prices.

Examples:
• A publisher charges 3 euro per issue for a
weekly magazine, but is willing to offer an
annual subscription for 100 euro.
•A grocer sells a packet of biscuits at 2 euro,
or two for 3 euro.
The above price concessions or discounts are a recognition by
the seller that the buyer is subject to the Law of Diminishing
Marginal Utility. To persuade the buyer to purchase more of
the good, the seller must make additional units available at a
lower unit price.

Conditions necessary for Price
Discrimination

1 Element of monopoly power.
There must be some barriers to entry to the
market. If this were not so, new firms could
supply a similar good on the higher price market,
at a lower price. The monopolist would then have
to abandon his discriminatory pricing policy, or
lower the price charged.
2 Distinct and separate markets.
The markets must be distinct and separate.
Consumers in the market where price is relatively
low must not be able to resell to consumers in the
high priced market. Otherwise the transfer of
goods purchased in the lower priced market to
the higher priced market would make the
charging of different prices in the two markets
impossible.

Certain characteristics of consumers make
the practice of price discrimination more
likely, these are:

1 Consumer ignorance: Consumers may not be
aware that the good or service is available from
another supplier at lower price.
2 Consumer inertia: Even if they are aware of it’s
availability at a lower price, consumers may
regard the difference in price as insignificant.
Therefore, they may be reluctant to change from
one supplier to the other.
3 Consumer attitude to the good or services in
question: Consumers may be willing to pay a
higher price for the good or service supplied by
one firm because of a certain status.

How a Price Discriminating
Monopolist Reaches Equilibrium

Below are the tables of the revenue conditions of a
manufacturing firm, selling its product on the home and the
foreign markets.

The firm faces a downward sloping demand curve for the
product on both products. In order to sell more the Price will
have to be reduced.

Unit of Average Total Marginal
Output (Q) revenue Revenue Revenue
(AR=P) (TR=PXQ) (MR=
Change of
TR)
1 50 50 50
2 45 90 40
3 39 117 27
4 35 140 23
5 31 155 15

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