Question

3. Short essay:

1. Explain how a monopolist can increase profits by price discriminating.

B. What are the conditions (4) necessary for price discrimination?    

Answer 1

Price discrimination refers to charging the different prices from different group of buyers for the same product ,this is done by the monopolists .

There are different methods of maximising profit (degrees)

first degree Price Discrimination- price discrimination in which a monopolist charges the maximum price that each buyer is willing to pay. This is also known as perfect price discrimination as it involves maximum exploitation of consumers and producer enjoys maximum profit .

second degree of price discrimination - price discrimination in which buyers are divided into different groups and different prices are charged from these groups depending upon what they are willing to pay.

third degree of price discrimination- price discrimination in which the monopolist divides the entire market into submarkets and different prices are charged in each submarket.

Price discrimination’s conditions

1.The firm must identify the different market segments, such as domestic users and industrial users.

2.Different segments must have different price elasticities .

3.Markets must be kept separate, either by time, physical distance and nature of use. Time based pricing - also called dynamic pricing - is increasingly common in goods and services sold online. In this case, prices can vary by the second, based on real time demand related to consumers' online activity.

4.There must be no outflow between the two markets, which means that a consumer cannot purchase at the low price in the elastic submarket, and then resell to other consumers in the inelastic submarket, at a higher price.

5.The firm must have some degree of monopoly power.