A seller indulges in price discrimination when he sells the same product at different prices to different buyers. Price discrimination is ‘personal’ when different prices are charged from different persons, ‘local’ when different prices are charged from people living in different localities, and ‘according to use’ when, for example, higher rates are charged for commercial use of electricity as compared to domestic use.
Price discrimination is possible when the seller is able to distinguish individual units bought by single buyer or to separate buyers into classes where resale among classes is not possible.
Thus, price discrimination is possible in case of personal services of doctors and lawyers. It is also possible when markets are too distant or are separated by tariff barriers. There may be a legal sanction for price discrimination as in the case of electricity charges from domestic and industrial users. It is also possible when some people are prejudiced against a particular market and prefer a posh market or when some people are too lethargic to move away from the nearest shopping centre.
Case 1: Equilibrium under Price Discrimination
A monopolist firm sells a single product in two different markets either different elasticities of demand. Resale among the customers is not possible. The firm has to decide how much total output should be produced and how it should be distributed between sub-markets and what prices should be charged in the two sub-markets. It is assumed that production takes place at the same point.
Case 2: Dumping
This is a special case when the firm is a monopolistic in the domestic market but faces perfect competition in the world market. Figure 10.7 shows the equilibrium of such a firm. ARH and MRH are the average and marginal revenue curves respectively which the firm faces in the home market. ARW or MRW is horizontal straight line at the level of prices Pw, prevailing in the world market. MC denotes the marginal cost curve. The aggregate MR curve is given by the curve AFEG which is the lateral summation of MRW and MRH. The profits are maximised when aggregate MR=MC, i.e., at point E. The firm would sell total output Q. In the home market, the firm would equate MRH to the equilibrium MC. Thus, the firm would sell QH units in the domestic market at a price PH which is higher than the international price PW. The remaining amount (Q-QH) would be sold in the world market at price PW. The area AFED denotes the total profits of this firm. The producer is said to be ‘dumping’ in the world market since he is charging less price in the world market than in the home market.