Price Discrimination

Introduction

In many markets in the world price discrimination is a pervasive phenomenon. Price discrimination affects consumer, products markets, travel and transport, telecommunication, electricity bills, water bills and many other services in the markets in South Africa. Price discrimination takes many forms and it is a phenomenon which can have both positive and negative effects, for consumers as well as consumer welfare either on a short run or at long run.

Purpose of Price Discrimination

The purpose of price discrimination by a monopolist (Eskom) is two fold. Firstly, is to increase his total revenue and profits and secondly, to produce a larger output than a non-practicing monopolist. Price discrimination is possible and profitable when Eskom is able to control the amount and distribution of supply and the buyers can be separated into different classes having a demand curve with different elasticity. Let us assume that the Eskom sells his total product in two sub-markets C and D Sub-market C has low price elastic demand for the product and the sub-market D has high price elasticity of demand.

Eskom will sell a greater quantity of his product by making a price reduction in market D. He sells lesser commodity in market C at a price higher than in market D. The Eskom will then earn maximum profit by price discriminating. In this context we will be discussing the third price discrimination. The third price discrimination refers to a situation where the price charged to a particular consumer depends on a signal related to the preferences of this consumer. Under third degree price discrimination, buyers are asked for different prices depending on their characteristics, for example lower prices for children, students or the elderly ones.

The classification of consumers into various categories in a way that the firms can capture consumer surplus is a very challenging task. It is very difficult for firms to determine which...