What are the Benefits of Price Discriminations?

Another example may be given. If railway fares were made uniform they would be higher than the present second class fares but lower than the present first class fares because the entire cost of providing service would have to be shared equally by all passengers.

Since first class passengers pay comparatively more, the second class passengers have to pay less. In this case also the system of charging discriminatory fares is beneficial to the poor people.

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If a monopolist practises price discrimination, is his output larger or smaller than if he did not do it? No single generalisation can be made. The total output of a monopolist with two prices can be larger or smaller than his total output if he were to sell all at one price.

If a monopolist is able to practise first degree discrimination, he would have an output as large as purely competitive output, given the same demand and cost functions. This is because the monopolist treats the consumers’ demand curve as his own MR curve. He equates this MR with his MC.

Thus he equates demand with MC, as in the equilibrium of pure competition. Since discrimination of the second degree approximates discrimination of the first degree, it follows that output is larger than in a situation where the monopolist had a single price. When a monopolist practices third degree discrimination, his output can be equal to or less.

Some commodities and services might not have been produced at all if sellers were not able to practice price discrimination.

The case of the physician may be recalled again. If he charges the same fees from all patients, the physician’s income would be too low to induce him to stay in the small locality.

However, if he charges higher fees from rich patients and lower fees from the poor patients he can earn enough to stay in the community.

Therefore, in this case, the continued availability of medical service hinges upon price discrimination.

Thus the price P3 is the average of the price P1 and P2. The line AP lies throughout to the right of the ordinary demand curve D. The cost curve AC lies above D but below AP. Therefore, there would be no output if the seller had to select one price on D.

But there is output with price discrimination because the seller can select an average price on AP, an average of discriminatory prices, which more than covers its costs than or greater than his output at a single price.

It depends on the shapes of the demand curves in the monopolist’s two markets. If the demand curves in the different markets are linear, then total output is the same as with a single price.

Mrs. Joan Robinson says that from the point of view of society as a whole it is impossible to say whether price discrimination is desirable or not. If price discrimination leads to an increase of output, price discrimination must be held to be superior to simple monopoly.

But against this advantage must be set the fact that price discrimination leads to a misdistribution of resources as between different uses. Price discrimination will be undesirable if it leads to a mal­distribution of resources and a decrease of output.

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