I was recently reading up on the Price Discrimination, first second and third degree. Although the author has laid out the concept neatly, there are no connections established between this concept and the market structures. Therefore, I came up with the above-mentioned question.

In my opinion, the key criteria to exercise price discrimination is that the firms must have some price setting abilities. So Perfect Competition is definitely out. In Monopolistic Competition prices tend to be sticky so I think that this might be one market form where Price Discrimination is not heavily practiced. In a Monopoly, though the situation is quite different as the sole producer can charge as much as he likes and could therefore engage in Price Discrimination. I am not sure as to what would happen in Oligopolisitc Market Forms.

Market power required for price-discrimination?

In my understanding, no. I'm pretty sure that one can show this mathematically, but I'll just give you the intuition. Price-discrimination (PD) increases profits, because it incorporates different price-elasticities by having different prices. Therefore, a firm that incorporates PD should make, c.p. more profits than a firm that does not.

Perfect competition means that less profitable firms are forced out of the market. In this case, perfect competition will lead to firms that act with price-discrimination whenever they can.

Think about restaurants, where there is a lot of price-discrimination going on, either via lunch offers or menu pricing. Restaurants really shouldn't have market power, should they?

  • Well, if you are considering restaurants then as far as I know, there will be monopolistic competition. Which means that the prices will tend to be sticky because if they weren't then the consumer would buy from a cheaper shop/restaurant. As a consequence, all the restaurants will not be able to influence their prices and hence they will possess low market power. To me this explains the existence of non-price competition in a monopolistic competition. – SuperMario Jan 21 '16 at 17:36
  • I think it's a bit more complicated than this. If perfectly competitive firms were all first-order discriminating then consumers would get zero surplus. But then a firm that set the (uniform) monopolist price would attract every consumer with a WTP above that price. If the demand curve is 1-p then this would yield it profit $1/4$. Price discrimination would yield profit $1/2n$ where $n$ is the number of firms. So as soon as there are more than 2 firms, first-degree PD should be unsustainable. – Ubiquitous Feb 20 '16 at 11:09

Who can price discriminate ? First, the firm must have market power or else it cannot charge any customer more than the competitive price. A monopoly , an oligopoly firm , a monopolistically competitive firm or a cartel may be able to price discriminate. However, a perfect competitive firm cannot price discriminate.

An oligopoly can PD for a simple reason because it has market power. Reason why firm price discriminates rather than price uniformly , is
1. PD firm charges prices higher to the customers who are willing to pay more than the uniform price.
A simple intuition behind this can be related to the elasticity of demand. As for an oligopoly (or any other form of market other than the perfect competition) , the price elasticity of demand is not that elastic (reason being there are either few firms in the market or only one) - so even if the firm charges price a bit higher to few customer , and a bit lower to others ; the quantity demanded by the people reduces(but to a very small extent, and this too depends upon the price elasticity of demand).
2. PD helps the firm capture the dead weight loss. It is often that CS and PS become a part of DWL. Price discrimination reduces DWL , as well as increases the Producer Surplus (given certain conditions hold though).

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