An introduction to the issue of price discrimination

PREFACE This discussion is not intended to be a legal treatise or a detailed explanation of the many provisions of the federal price discrimination laws. It is not a substitute for sound legal advice and does not take the place of competent legal counsel required in analyzing specific problems. This material is intended as a non-technical explanation of the major provisions of the federal price discrimination laws, to stimulate awareness of the more common problems encountered by businesses and the general principles which govern these areas. More business decisions are affected by the Act than by any other antitrust law.

An introduction to the issue of price discrimination

Classifying customers[ edit ] Successful price discrimination requires that companies separate consumers according to their willingness to buy. Determining a customer's willingness to buy a good is difficult.

Asking consumers directly is fruitless: The two main methods for determining willingness to buy are observation of personal characteristics and consumer actions. As noted information about where a person lives postal codeshow the person dresses, what kind of car he or she drives, occupation, and income and spending patterns can be helpful in classifying.

The natural priceor the price of free competitionon the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together.

The one is upon every occasion the highest which can be squeezed out of the buyers, or which it is supposed they will consent to give; the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business. Monopoly, besides, is a great enemy to good management.

Because the monopolist ultimately forgoes transactions with consumers who value the product or service more than its price, monopoly pricing creates a deadweight loss referring to potential gains that went neither to the monopolist nor to consumers. Given the presence of this deadweight loss, the combined surplus or wealth for the monopolist and consumers is necessarily less than the total surplus obtained by consumers by perfect competition.

Where efficiency is defined by the total gains from trade, the monopoly setting is less efficient than perfect competition.

Sometimes this very loss of psychological efficiency can increase a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives.

An introduction to the issue of price discrimination

The theory of contestable markets argues that in some circumstances private monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen when a market's barriers to entry are low. It might also be because of the availability in the longer term of substitutes in other markets.

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For example, a canal monopoly, while worth a great deal during the late 18th century United Kingdomwas worth much less during the late 19th century because of the introduction of railways as a substitute.

Natural monopoly A natural monopoly is an organization that experiences increasing returns to scale over the relevant range of output and relatively high fixed costs. The relevant range of product demand is where the average cost curve is below the demand curve.

An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly.

Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic. The most frequently used methods dealing with natural monopolies are government regulations and public ownership.

Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices. By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve.

Average-cost pricing is not perfect. Regulators must estimate average costs. Companies have a reduced incentive to lower costs. Regulation of this type has not been limited to natural monopolies.

By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price is less than the marginal cost which is the output quantity for a perfectly competitive and allocatively efficient market.

Government-granted monopoly A government-granted monopoly also called a " de jure monopoly" is a form of coercive monopolyin which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity. Monopoly may be granted explicitly, as when potential competitors are excluded from the market by a specific lawor implicitly, such as when the requirements of an administrative regulation can only be fulfilled by a single market player, or through some other legal or procedural mechanism, such as patentstrademarksand copyright [69].

Monopolist shutdown rule[ edit ] A monopolist should shut down when price is less than average variable cost for every output level [70] — in other words where the demand curve is entirely below the average variable cost curve.

Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. June Main article:Price discrimination: Price discrimination, practice of selling a commodity at different prices to different buyers, even though sales costs are the same in all of the transactions.

Discrimination among buyers may be based on personal characteristics such as income, race, or age or on geographic location. For price. 1. Introduction. This bibliographic essay collects scholarly, government and professional sources in an effort to show how court-ordered human-rights based decisions and legislative responses in U.S.

nationality law, coupled with an American notion of nationality as “allegiance” and accidents of history in matters of taxation and a longstanding principle of "citizenship-based taxation. So that's just an introduction to price discrimination. Next time we'll look at the question, is price discrimination good?

An introduction to the issue of price discrimination

We've shown that it can increase profits, but what's the effect of price discrimination on social welfare? Economics is much more than just numbers and graphs. We can use economics to explain much of what we encounter in our daily lives. Using the basic economic concept of incentives, Tyler Cowen and Alex Tabarrok take us through several examples that show how to view the world through the lens of .

Keywords: price discrimination effects, price discrimination definition, price discrimination analysis The main reason to carry on economic functions of a firm is profit maximization.

In the way to the profit maximization main variable is the marginal cost of the products they sell. Dumping and international price discrimination Introduction. Dumping is, in general, a situation of international price discrimination where the price of a product which is sold to the importing country is less than the price of the same product when sold in the market of the exporting country.

It is generally perceived that dumping would.

Price Discrimination