The theory of price discrimination throws almost the whole emphasis on the demand side. Of course, costs must be aligned with demand, but it plays a subordinate role. In contrast, business practice usually puts the stress on differences in costs; because demand is often hard to estimate, it tends to be ignored.
1. Personal Discrimination:
In the case of personal discrimination different prices are charged from different buyers according to their intensity of desire or ability to pay.
Usually this type of discrimination is not made openly but in a disguised manner. Thus the new book of a famous author may be published as a deluxe edition with a very high price. It will cater to the demand of affluent people who can afford to pay high price.
Finally a paperback edition is issued for poorer classes. The price charged for the deluxe edition is considerably higher than the cost of producing it.
But it has a snob appeal or prestige value for which those who are able may be induced to pay more. This principle is applied to railway and tramway passengers. Passengers travelling in the upper classes pay more than the cost of providing extra facilities.
2. Local Discrimination:
In the case of local discrimination, different prices are charged from different localities. Prices in fashionable shops where the rich buyers go are usually higher than those in the ordinary shops where poor people go to buy.
Dumping is an example of local discrimination. The monopolist charges a high price in the home market and a low price in the foreign market. During the inter-war period Japan resorted to this method for capturing foreign markets.
3. Trade or Use Discrimination:
Trade discrimination implies charging different prices for different uses. For example, electric company charges a higher rate for domestic consumption and a cheaper rate for industrial uses.
The principal forms of price discrimination, as they exist in our economy are given in the following table.
Prof. Pigou has referred to two conditions for price discrimination. Price discrimination is possible if there are separate markets and no unit of demand which is appropriate to one market can be transferred to another market and no unit of supply can be transferred from one market to another.
The most familiar case is the sale of direct personal service where there is no possibility of transfer from one market to another. If a surgeon charges low fees from a poor patient for some operation, it is not possible for the poor patient to re-sell the benefit received to the rich patient for whom the doctor may have fixed up a very high rate.
Thus price discrimination is possible because supply cannot be transferred from low-price market to the high-price market.
Similarly, price discrimination has been rendered possible because the rich man cannot become poor for the sake of receiving cheap doctoring. Discrimination is also rendered possible when the markets in which a monopolist is selling are separated from each other geographically or by tariff barriers.
In the real world, markets are kept separate in many ways. The markets for the box seats or balcony seats in cinema halls are segregated by tickets and ushers.
Electric power companies use meters to separate the markets for electricity for lighting, cooking and commercial uses. Sometimes the basis of price discrimination is the imperfect knowledge and the sheer ignorance of the buyers.
Domestic market is also kept separate by tariff wall, as in case of dumping domestic buyers cannot place orders abroad at the lower foreign price and import the commodity.