Possibility of Price Discrimination
Here we understand about the Possibility of Price Discrimination in detail.
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Possibility of Price Discrimination
Before we discuss about its possibilities, first we understand what is Price Discrimination.
Price discrimination refers to the act of charging different prices for different units of commodity, though all these units are in fact indentical so far as their physical features are concerned.
Price discrimination is possible when the following conditions are fulfilled:
- Classification of Market:
- Resale Impossible:
- Existence of Monopoly:
- Ignorance of Buyers:
- Price Differential Negligible:
- Non-Transformation:
- Irrational Feeling of the Buyers:
- Separation of the Markets:
- Direct Service:
- Nontransferable Commodity:
- Classification of Market: There should be at least two or more than two markets or groups of buyers for the monopoly product or the service. If there is only one market or one group of buyers for the product, price discrimination would not be possible. Means, price discrimination can occur if it is possible for the seller to split up the total demand for the product into different markets.
- Resale Impossible: There should not be any possibility of resale of the products or service from the customer in the low priced market to the customer in the high-priced market. If, for eg- the consumers to whom the products in sold at a low price can resale it to those from whom higher price are charged for the same product, the firm will not be able to carry out its policy of price discrimination. If industrial buyer of cheap electricity can resale it for direct consumption for household purposes, there will never be two price for the electricity.
- Existence of Monopoly: It is possible under monopoly, that is, the discriminating firm must be a monopolist. Price discrimination is not at all possible under the condition of perfect competition. Under perfect competition, there is a large number of firms which produce identical products. Besides, the firms and consumers have perfect knowledge of market conditions. Hence, if any firm charges even a slightly high price. It would lose all its buyers. If there is imperfect competition and if they have common understanding among the competing firms to follow a uniform price policy, price discrimination would be possible under such conditions.
- Ignorance of the Buyers: Price discrimination becomes possible due to ignorance and laziness of the buyers. It can happen when the buyers of the dearer market are quite ignorant of the fact that the seller is selling the same product at a lower price in another market. Same way, even if the consumers are aware of this fact but due to laziness if they do not go to purchase in the cheaper market, price discrimination will persist.
- Price Differential Negligible: Price discrimination occurs when the price is differential is so small and negligible that buyers do not consider it worth while worrying about it. The buyers have a tendency to ignore small differences in prices.
- Non-Transformation: Price discrimination becomes possible when several groups of buyers require the service for clearly differentiated commodities. for eg- railways charge different freight rates for the transport of cotton and coal. In this case, it is possible since bales of cotton cannot be turned into loads of coal in order to take advantage of the cheaper rate of transport for coal.
- Irrational Feeling of the Buyers: Price discrimination exist when the consumer has an irrational feeling that though he is paying a higher price, he is paying is for better good, although it may be of the same quality.
- Separation of the Markets: Discrimination occurs when the markets are separated by long distances or tariff barriers so that it becomes very costly to transfer goods from a cheaper market to be resold in the dearer market. For eg- a product sold in one town for Rs. 2 and in another town for Rs. 2.50. Now, so long as the transport cost is less than 50 ps. per unit, resale will be profitable but if it is equal to or more than 50 ps. per unit, resale will not be profitable. Same way, when a producer is selling his goods in two different markets, in home market which is protected by a tariff and in a foreign market without a tariff. He can take advantage of the tariff and can raise the price of the product in the home market. As a result, he will be selling the product at a lower price in the foreign market than in the home market. This device of selling the goods at cheaper rate in the foreign market than in the home market is known as dumping.
- Direct Service: Price discrimination occurs when the nature of the goods is such that it is possible for the seller to charge different prices from different customers. This happens when the goods in question is a direct service. Thus, while goods like radio, electric fan, watch, etc. can be resole, the same is not possible in the case of personal services like those of a doctor, lawyer, teacher, nurse etc. Resale of such direct services is impossible, differences in their prices can exist for different customers. For eg- Surgeons charge different fees from rich and poor patients for performing same surgical operations.
- Nontransferable Commodity: The demand must not be transferable from the high priced market to low priced market. This happens when the markets are split upon the basis of wealth. For eg- a rich man will not like to become poor in order to enjoy the benefits of paying lower fees to a doctor. Similarly, if rich people do not buy deluxe editions of certain popular books and wait for cheaper editions, personal price discrimination in books will not be possible. There should be not possibility of transferring a unit of the commodity from the high-priced market to the low-priced market.
CONTINUE READING
Possibility of Price Discrimination
Existence of Monopoly
Classification of Market
Nontransferable Commodity
Resale Impossible
Ignorance of the Buyers
Price Differential Negligible
Irrational Feeling of the Buyers
Direct Service
Non-Transformation
Separation of the Markets
Price Discrimination - Possibility of Price Discrimination.
Kinnari
Tech writer at NewsandStory