The modern theory of price discrimination began with the work of Arthur Cecil Pigou (1877- 1959) and is defined by Machlup (1955): "Price discrimination may be defined as the practice of a firm or group of firms of selling (leasing) at prices disproportionate to the marginal costs of the products sold (leased) or of buying (hiring) at prices disproportionate to the marginal productivities of the factors bought (hired)". But in simpler terms, "price discrimination is often defined as charging different customers different prices for the same or highly similar offering" (Smith, 2004). The motive behind this is to increase profit by reducing consumer surplus. If the same price is charged to all consumers, some potential revenue is lost since some of the consumers would have been prepared to pay more. But before answering the question of whether firms should price discriminate or not, we will have to distinguish between the various types of price discrimination and before that it is important to note that there are three necessary conditions for a firm to practise price discrimination, namely, the firm must be a price maker, the elasticity of demand must be different in the different markets and finally, the market must be clearly separated. To begin with, the extent to which the monopolist can grab consumer surplus, which is "the extra satisfaction or utility gained by consumers from paying an actual price for a good that is lower than that they would have been prepared to pay"(Davies, Lowes and Pass, 2000), is referred to as the degree of price discrimination and there exists three degrees of price discrimination: first degree, second degree and third degree price discrimination. "First-degree price discrimination occurs when the sell... ... middle of paper ... ...e domestic market. Now, after having explained the various types of price discrimination, we can tackle the question of whether firms should price discriminate or not. This can be done by analyzing the benefits and drawbacks of price discrimination on firms as well as on consumers and society. So, first of all, as already mentioned above, firms should price discriminate in order to increase their revenue and consequently profits as price discrimination allows them to capture consumer surplus. In addition, first price discrimination (perfect price discrimination) brings economic efficiency since it eliminates deadweight loss which is "the reduction in consumer's surplus and producer's surplus that results when the output of a product is restricted to less than the optimum efficient level that would prevail under perfect competition" (Davies, Lowes and Pass, 2000).
Apart from Antitrust laws, there are several other laws that promote fair business practices. The Robinson-Patman Act prohibits price discrimination. This act ...
A couple of Squares has a limited capacity for which to produce their products and smaller companies tend to have larger fixed costs than bigger companies. Therefore, A Couple of Squares must maximize profits in order to ensure that they will stay in business. A profit-oriented pricing objective is also useful because of A Couple of Squares’ increased sales goals. A Couple of Squares increased their sales goals due to recent financial troubles. Maximizing profits is the easiest way to meet these sales goals due to the fact that A Couple of Squares has limited production capacity. The last key consideration favors a profit-oriented pricing objective because A Couple of Squares offers a specialty product. A specialty product often has limited competition, therefore can be priced on customer value. Pricing at customer value will maximize profits as well as customer satisfaction. A Couple of Squares’ lack of production capacity, increased sales goals, and specialty product favor a profit-oriented pricing
The monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price.
Others added that monopolies produce less output and charge a higher price than a purely competitive environment. The monopolist sets the marginal revenue equal to marginal cost and output is therefore smaller. In monopolies, profits can persist indefinitely, because high barriers to entry prevent new firms from taking part in the
An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies. Although firms in oligopolies have competitors, they do not face so much competition that they are price takers (as in perfect competition). Hence, they retain substantial control over the price they charge for their goods (characteristic of monopolies).
Price discrimination can be defines as when a firm offers an “individual good at different prices to different consumers” The Library of Economics and Liberty elaborates on its pricing strategy, stating Comcast offers different pricing depending on what features the consumer desires. For instance, the cable company will charge a higher price to a person who uses several services as part of their cable package. Conversely, the firm charges a very low price to someone who would “otherwise not be interested” , providing basic services at a minimum price. It takes advantage of the regulation imposed on the cable industry by offering the required basic package at seemingly attractive prices. Using this pricing system allows for it to attract different consumers whose maximum price they are willing to pay differs. Recently, Comcast attempted a new billing strategy by introducing a data usage cap. It essentially expanded on the company’s existing price discrimination method by charging customers according to how much data they used each month. Comcast also utilizes penetration pricing, where it offers its product at low prices to attract new consumers, later raising the prices once the customer is subscribed for a certain amount of time. Generally it claims the original prices were promotional only, lasting only a small amount of
...e. A price gouger needs to charge more in order to avail the product or service. In the case of Raleigh, the roads to the town were not accessible due to fallen trees and rocks. An entrepreneur would need to cut the trees and remove the rocks in order to take the product there. People who do that need compensation for all the trouble they take to bring products to the market. The youths who brought ice to Raleigh town had to cut down trees in order to access town. Instead of selling ice as the “right price” of less than 2 dollars, the youths charged more than 8 dollars. The price provided just there right compensation for all their efforts. Banning price gouging led to serious suffering of the people because the little food left went bad causing even more losses. For a few dollars for the price of ice, Raleigh residents could have saved millions worth of food.
Predatory pricing “is alleged to occur when a firm sets a price for its product that is below some measure of cost and forfeits revenues in the short run to put competitors out of business” (Sheffet p.163-164). The reason firms take the short term loss is because they hope to drive out competitors and raise prices to monopolistic levels. By doing this, they covered their short term loss to make even greater profits in the long term than they would have by not using predatory tactics (Sheffert). Predatory pricing became illegal under Section 2 of the Sherman Act. It has remained one of the more difficult allegations for prosecutors to prove, due to the complexity of determining the company’s actual intent and whether or not it the strategy is competitive pricing. According to Areeda and Turner, there are three ways to determine if a firm is implementing predatory pricing. First, a price above marginal cost is presumed lawful; second, a price below marginal cost is considered unlawful, except when there is strong demand; and third, average variable cost is considered a good proxy for marginal cost. This is a reason predatory pricing is still important today. The courts must decide whether or not companies are engaging in competitive prices for the good of the consumers or are using predatory tactics for the good of their own company. The purpose of this paper is to focus on the current legislation regarding predatory pricing, determining when there is predation in an industry and the cause and effect relationship it has on an industry.
Monopolies are when there is only one provider of a specific good, which has no alternatives. Monopolies can be either natural or artificial. Some of the natural monopolies a town will see are business such as utilities or for cities like Clarksville with only one, hospitals. With only one hospital and there not being another one for a two hour drive, Clarksville’s hospital has a monopoly on emergency care, because there is not another option for this type of service in the area. Artificial monopolies are created using a variety of means from allowing others to enter the market. Artificial monopolies are generally rare or absent because of anti-trust laws that were designed to prevent this in legitimate businesses. However, while these two are the ends of the spectrum, the majority of businesses wil...
The competition and consumer act aims to discourage price discrimination in the business environment if the discrimination could substantially reduce competition. An example of price discrimination would be Apple with the distribution of IPhone 5c around the world, the prices vary from $500-$1,500(local currency). The IPhone 5c is less-profitable for Apple but still the price range has a big gap e.g., in Singapore the iPhone costs $948, but in the UK it costs $529 . There are three types of price discrimination (first degree, second degree and third degree) and they all discriminate differently. The price discrimination in business will increase revenue, they will attract more consumers and will enable companies to stay in business. The consequences for price discrimination is that the manufacture/business will get sued by consumers for price discrimination especially when paying higher prices, decline in consumer surplus, there may be administrative costs of separating the markets etc. However, Price discrimination has a lot of impacts on consumers and business owner 's around the world but most importantly it affects people that have been discriminated over the price for the same
Price discrimination is practiced by a seller through giving tagging different prices to goods under different markets. Product cost details differentiates price discrimination from product differentiation (Vogel & National Bureau of Economic Research. 2009). First degree price discrimination enables the seller to know maximum price in a monopoly market. Sellers know the price every consumer is willing to pay for a good or service. First degree price discrimination is seldom possible because the seller gains revenues from consumer surplus, thus difficult to fall in loss (Corsetti & Dedola, 2003).
Firms with market power or monopolies are often seen as detrimental for customers and economic welfare. According to the neoclassical theory, the market power of monopolies and oligopolies is potentially higher than that of firms in monopolistic or perfect competition since they have to face very limited competition, if any (Ferguson and Ferguson 1994). In monopolistic or perfect competition can make supernormal profits in the short term but eventually other firms will enter the market and offer alternative products that reduce the demand for the established firm’s products (Sloman et al., 2013 p. 177). Dissimilarly, this is not the case for dominant firms or monopolies; the lack of competition allows them to set prices and make supernormal profits increasing the perception that big companies are “bad” for consumers. As shown by the graphs in Figure 1 and 2, there are substantial differences in the competitive and monopoly markets. In a competitive environment, the equilibrium is reached where demand meets supply. In a monopolistic market, thanks to the establishment of higher prices and the production of lower quantities, monopolies or dominant firms make supernormal profits; additionally, there is a deadweight loss and some consumers who were willing to pay lower prices wil...
Price Elasticity is the measure in responsiveness of consumers to changes in the price of a product or service. The evaluation and consideration of this measure is a useful tool in firms making decisions about pricing and production, and in governments making decisions about revenue and regulation. “Price Elasticity is impacted by measurable factors that allow managers to understand demand and pricing for their product or service; including the availability of substitutes, the consumer budgets for the product or service, and the time period for demand adjustments.” The proper consideration of Price Elasticity allows managers to set pricing such that the effect on Total Revenue is predictable and adjustments to production are timely. The concept of Price Elasticity is employed in the management of commercial firms and government.
Perfect and monopolistic competition markets both share elasticity of demand in the long run. In both markets the consumer is aware of the price, if the price was to increase the demand for the product would decrease resulting in suppliers being unable to make a profit in the long run. Lastly, both markets are composed of firms seeking to maximise their profits. Profit maximization occurs when a firm produces goods to a high level so that the marginal cost of the production equates its marginal
This allows for an individual business to be able to have a complete monopoly over their given product with the competitive advantage of differentiation. This he identifies allows for certain levels of control of price and product, which he believes is the benefit of choosing monopolistic competition as it allows for greater competition amongst firms (Chamberlin’s monopolistic competition, 2008). This would usually take form in a brand name. He notes though that monopolistic competition and a monopoly have considerable differences when considering a differentiated product a “monopolistic” product over another, and identifies them in the following (Chamberlin’s monopolistic competition, 2008):