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One customer does not know what is being charged from the other. Product Differentiation: Sometimes a monopolist’s market consists of rich and poor consumers.He takes advantage of the whims of the rich and offers the same production in a deluxe packing. Sanction: Sometimes government also permits the public utility services like the railway to charge different prices from different consumers, and different prices for the use of electricity by Individual and domestic purposes.
(2) Second Degree Discrimination: It occurs where a monopolist sets different prices for different customers but does not fully exploit their potential demand prices; the monopolist captures only parts of his customer’s consumer’s surpluses.
The schedules of rates typically charged by public utilities like railways can be regarded as form of second-degree discrimination.
In doing so the job of a particular structure of discounts may be quite specific. Reduction of Production Costs: Differential prices can sometimes help solve problems of production.
Seasonal or other forms of time-period discounts may be allowed partly for the purpose of regularising Output changing the timing of sale.
When products are homogeneous, competitive parity is a compelling consideration.
Price discrimination needs some conditions in the market. Existence or Monopoly: Discrimination is possible only if monopoly exists and there is no competitor in the market or when the producers enter into agreement among themselves to sell the products at agreed prices. Division or the Markets into Sub-Markets: The market is distinctly divisible into various parts among which the product cannot be exchanged; examples are a home and a foreign market separated by governmental restrictions or by a tariff wall and the market for hair-cuts or a surgeon’s fees- in the former case domestic buyers cannot import the product at the low price and in the latter services are rendered to individuals personally. Expenditure in Sub-Dividing the Market should not be More than the Expected Profit Increase from Price Discrimination: Sometimes a monopolist has to incur some expenditure on keeping the sub-markets separate so that he can fix different prices in different sub-markets and the consumers are restrained from transferring the product from one sub-market to the other. Consumer’s Ignorance: When the consumers of one market are ignorant of the prices prevailing in the other markets, price discrimination can be successful. Difference in Consumer’s Purchasing Power: Variance in the purchasing power of the customers also helps in price discrimination.It permits the appropriation of the consumer’s surplus so that it accrues to the producer rather than to the consumer. Implementation or Marketing Strategy: The patterns of price differentials should implement the company’s overall marketing strategy.These price differentials should efficiently geared with other elements in the marketing programme to reach of the sectors the market selected by strategy.A breeder of horses dealing individually with various buyers in different parts of the country, with a highly imperfect market and absence of knowledge on the part of each buyer of the prices being charged from other buyers, may be able to carry on perfect discrimination to a limited extent.Obviously, perfect discrimination is useful only in theory as a concept.The firm wants to first sell to the group who will pay the highest price for the new product.It then reduces the cost slightly and sells to another group with only a slightly less demand for the good.Thereby he is able to charge a higher price from the richer section of consumers. Price discrimination is done only when elasticity of demand for the product is different for different buyers, the amounts demanded of the product differs at the same price i.e., the demand prices differ.Discrimination is designed to gain revenue by varying the price in term of the demand prices of the customers. (1) First Degree Discrimination: In discrimination of the first degree the monopolist is supposed to know the maximum amount of money each consumer will pay for any quality. This is ‘perfect’ price discrimination because it is an extreme limiting case of the same.This policy is commonly known as price differential or price discrimination policy. John Robinson has defined price discrimination as follows. From the seller’s standpoint, the differential price that result from the application of various discount structures and from product- line pricing may serve several purpose, it is, therefore (desirable to look first at the company’s structure of price discriminations in terms of its motives, which may be grouped follows: 1.“The act of selling the same article, produced under a single control at different prices to different buyers is known as price discrimination”. Market Expansion: Differential pricing that is designed encourage new users or new customers is a common goal product- line pricing, but it also extends over various phases of discount structure, depending upon the circumstances of a purchase by a new user. Market Segmentation: A major objective of price discrimination is to achieve profitable market segmentation when legal and competitive considerations permit discrimination.