managerial economics; pricing practices

2. Contents:
• Meaning
• Necessary Conditions
• First Degree Price Discrimination
• second Degree Price Discrimination
• Third-degree price Discrimination

3. Meaning:
Price Discrimination refers to the
charging of different prices for different
quantities of a product, at different times, to
different customer groups of in different
markets, when these difference are not justified
by cost differences.
Example: Electricity suppliers charge Higher
prices to business than to households.

4. Conditions:
Three conditions must be met for a firm to
be able to practise Price Discrimination:
1. The firm must have some control over the
price of the product .
(i.e., the firm must be an imperfect
competitor.)
•

5. 2. The price elasticity of demand for the
product must differ for different quantities of
the product, at different times, for different
customer groups, or in different markets.

6. 3. The quantities of the product of service, the
times when they are used of consumed, and the
customer groups of markets for the product must
be separable (i.e., the firm must be able to
segment the market).

7. Degree of Price Discriminations:
Prof. A.C. Pigou has given the following three
degrees of discriminating monopoly:
1. Price Discrimination of first degree
2. Price Discrimination of second degree
3. Price Discrimination of third degree

8.  First-degree price discrimination involves selling
each unit of the product separately and
charging the highest price possible for each unit
sold.
The firm extracts all of the consumers’ surplus
from consumers and maximizes the total revenue
and profits from the sale of a particular quantity of
the product.

9. 0
6
5
4
3
2
1
-
-
-
-
-
-
A
-
10 20 30 40 50 60
B
C
D
H
G K
J F
Price
Quantity

10. In the absence of first-degree price
discrimination, however, the firm will charge
the price of ₹2 for all the 40 units of the
product and receive a total revenue of only
CF0G = ₹80.The difference between what
consumers are willing to pay (ACF0 = ₹160)
and what they actually pay (CF0G = ₹80) is
the consumers’ surplus (triangle ACG =
₹80).

11.  Second-Degree Price Discrimination is more
practical and common.
This refers to the charging of a uniform price per
unit for a specific quantity or block of the product
sold to each customer, a lower price per unit for
an additional batch or block of the product.
By doing so, the firm will extract part, but not at all,
of the consumers’ surplus.

12. • Second degree price discrimination is often
used in the pricing of electric, gas, water, and
other public utilities; in the renting of
photocopying machines; in the use of
computers; and so on.

13. 0
6
5
4
3
2
1
-
-
-
-
-
-
A
-
10 20 30 40 50 60
B
C
D
H
K
J F
Price
Quantity
G

14. • Suppose that the firm of above figure sets the price
of ₹4 per unit on the first 20 units of the product
and the price of ₹2 per unit on the next batch of
20 units of the product. The total revenue of the
firm would then be BJ0H = ₹80 from the first batch
of 20 units of the product and CFJK = ₹40 from the
next batch of 20 units, for overall total revenue of
₹120. thus, the firm can extract one-half or ₹40
(BKGH)of the total consumers’ surplus.

15. Third-degree Price Discrimination refers to the
charging of different prices for the same
product in different markets until the
marginal revenue of the last unit of the product
sold in each market equals the marginal cost
of producing the product.

16.  If the firm sells a product in two markets, the firm
will maximize its total profits by selling the product in
each market until MR1 = MR2 = MC.
The firm to be able to practice this or any other type
of price discrimination, the firm must have some
monopoly power.
 The price elasticity of demand for the product
must be different in the different markets, and the
markets must be separable.

17. Third-degree Price Discrimination Graphically:
Higher price in
the less elastic
Market
Lower price in
more elastic
market
Third-degree price Discrimination

18. References:
1. Managerial Economics, principles and worldwide
applications, eighth edition(2019) , Dominick salvatore,
siddhartha K.Rastogi.
2. Modern Microeconomics,second edition(2017)
A.Koutsoyiannis.
3. Advanced economic theory: Microeconomic analysis,
Nineteenth edition, H.L.Ahuja.
4. Various Online sources.