Price Discrimination under Monopoly

Price discrimination occurs when a monopolist sells the same product to different buyers, or in different markets, at different prices, where the price difference is not explained by a difference in the cost of supplying them. Everyday examples familiar to a student of this syllabus include railway and electricity tariffs, where different categories of consumers pay different rates for what is essentially the same service.

Conditions for successful price discrimination.

1. The seller must have genuine market power (a monopoly or near-monopoly), otherwise competitors would undercut the higher price.
2. The markets must be effectively separable — resale from the low-price market to the high-price market must be impossible or too costly, otherwise arbitrage would equalise the price.
3. The price elasticity of demand must differ between the markets — the monopolist charges a higher price where demand is less elastic and a lower price where demand is more elastic.

Degrees of price discrimination. First-degree (perfect) discrimination charges each buyer the maximum they are willing to pay. Second-degree discrimination charges different prices for different blocks of quantity (e.g. a lower per-unit electricity tariff after the first few units). Third-degree discrimination — the most common and the one studied in detail here — divides buyers into separate markets and charges each market a different uniform price. …