Price Discrimination Question

Tidyweb

Can someone answer a short question.

In all text book it says you must be a monopoly to price discriminate. But mobile phone companies price discriminate as do cinemas. None of these are monopolies.

Have I got this wrong?

Jim2007

Tidyweb wrote: »

Can someone answer a short question.

In all text book it says you must be a monopoly to price discriminate. But mobile phone companies price discriminate as do cinemas. None of these are monopolies.

Have I got this wrong?

Do they charge different prices for the same service to the same customer group?????

hivizman

Tidyweb wrote: »

Can someone answer a short question.

In all text book it says you must be a monopoly to price discriminate. But mobile phone companies price discriminate as do cinemas. None of these are monopolies.

Have I got this wrong?

The key point is that you can't have price discrimination in a perfect market. In such a market, all transactions take place at a single market clearing price (sometimes referred to as "the law of one price"). Consumers are assumed to have perfect information, so would not pay a higher price for a commodity when it was available at a lower price. A situation where a supplier attempted price discrimination would thus be unstable, because (a) consumers would refuse the higher price, and (b) arbitrageurs would buy at the lower price with the aim of selling at the higher price, and this would tend to equalise the prices.

To achieve price discrimination in practice, it is necessary to achieve some sort of market segmentation, with barriers making it difficult, if not impossible, for consumers in one market to enter the other market(s). This is often achieved through some form of product differentiation, but you are probably more interested in price discrimination without product differentiation. One form of market segmentation is geographical - a firm charges different prices in different markets for an identical product, where the price differential is not justified purely in terms of differential transaction costs. The firm may be able to restrict customers to just one market through contractual terms, but it needs some market power for this (otherwise competitors would enter the higher-priced market or arbitrage would occur), and this implies that the firm is at least an oligopolist.

So strictly you don't have to be a monopolist to discriminate on price, but you do need some market power.

A straightforward explanation is given on tutor2u.net.