We shall assume here that the monopolist practices third degree price discrimination, i.e., he charges different prices for his product in different markets.
In this case, the first and foremost condition for price discrimination to be possible states that the product must not be resalable.
In order to explain the point, let us suppose that the monopolist sells his product in two different markets A and B, and he takes a higher price (say, Rs 20) from the buyers in market A and a lower price (say, Rs 15) from buyers in market B.
Now if the product can be resold, then many of the buyers in market B would purchase the commodity at Rs 15 and sell it to the buyers in market A at a higher price (the price would be more than Rs 15 and less than or equal to Rs 20)—let us suppose, they would sell the product in market A at the price of Rs 18.
ADVERTISEMENTS:
If they do this, they would have a profit of Rs 3 per unit of the resold product. The buyers in market A would also buy from them at Rs 18, rather than buying the commodity from the monopolist at Rs 20.
In the above example, we have seen that if the monopolist’s product is resalable, then he would not be able to sell it at a higher price in market A. If he wants to maintain his hold in the market, he would have to sell his product at the same price in both the markets. Price discrimination under these circumstances is not possible.
Now, let us see under what circumstances or under what conditions, the monopolist’s product is not resalable. First, if the geographical distance between different markets of the monopolist’s product is so great that the buyers or middlemen in the cheaper market cannot profitably transport the commodity from this market to a dearer market, then the product would not be resalable, and then it would be possible for the monopolists to discriminate between different markets w.r.t. price.
For example, it is not possible for a person to buy a commodity in a market in Kolkata and profitably transport and resale it in a market in Mumbai, and so, it would be possible for the monopolist to take different prices in these markets, i.e., it would be possible for him to discriminate w.r.t. price.
ADVERTISEMENTS:
Second, a commodity, like electricity, may have different uses for different groups of buyers. For example, some buyers would use electricity in industry and some would use it for domestic purposes.
Since it is not possible for the buyers of the latter group to buy electricity at a cheaper rate and resale it to buyers of the former group, it would be possible for the monopolist to set a lower price for the buyers of the latter group and a higher price for the buyers of the former group.
Electricity cannot be resold by its buyers also because the buyers and sellers of the commodity are physically connected by means of electrical cables. As a result, if any buyer tries to resell the commodity, the seller would come to know of this, and would take suitable steps against such resale.
Third, if the commodity that is sold by the monopoly is in the nature of direct service, then reselling would not be possible. For example, a physician is selling a direct (medical) service to his patients. He would be able to take a higher fee from a rich patient and a lower fee from a poor patient.
ADVERTISEMENTS:
For it is not possible for the poor patient to resell the service that he obtained from the physician to the rich patient. The same reasoning applies to the service provided by a lawyer or that by a hair-cutting saloon. Of course, in order to be able to practice price discrimination, the provider of the service should be a monopolist.
He must not have any close rival. For then the buyer who is discriminated against, may shift to the provider of a close substitute service. We have discussed above the circumstances when price discrimination between different groups of customers or different markets may be possible.