SummaryIn this second LP on monopolies, we learn about a few more types of monopolies, quite particular ones. We learn about discriminating monopolies, how the implement different prices in order to extract all consumer surplus. We also learn about natural monopolies, which are tricky since they are actually good for society.
Price discrimination, also referred to as price differentiation, occurs when a firm sells the same product at different prices, either to the same or different consumers. The study of this strategy comes naturally when dealing with monopolies as these seek to sell additional output to consumers without lowering the price of the units that are already being sold so as to maximise their profits. Good examples of price discrimination are transportation or storage costs. To optimise price discrimination, firms will have to control and prevent reselling, and they will also have to sort consumers depending on their willingness to pay. The former does not generally imply complications, but sorting consumers is a more complex process.
Arthur C. Pigou made a distinction between different levels of price discrimination in his book “The Economics of Welfare”, 1920. The first degree or perfect discrimination is given when the monopolist charges each unit with a price that is equal to the consumer’s maximum willingness to pay for that unit. The second degree or nonlinear price fixing is given when price depends on the amount bought by the consumer as in quantity discounts. Finally, the third degree or market segmentation of price discrimination occurs when there are several differentiated market segments to which the firm will apply different prices, e.g. student or third age discounts.