Prof. A.C. Pigou has referred to three types of discriminating monopoly or price discrimination.
In discrimination of the first degree, the monopolist knows the maximum amount of money each consumer will pay for any quantity. He then sets his prices accordingly and takes from each consumer the entire amount of his consumer’s surplus.
In other words, discrimination of the first degree involves maximum possible exploitation of each buyer in the interests of seller’s profits. Price discrimination of the first degree is said to occur when the monopolist is able to sell each separate unit of the output at a different price.
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Thus under discrimination of the first degree every buyer is forced to pay the price which is equal to the maximum amount he is willing to pay rather than do without the goods altogether. The idea is no buyer is able to enjoy any amount of consumer’s surplus.
But for that purpose it is necessary not only to charge different prices from different buyers but to charge different prices for different units purchased by the same buyer.
Mrs. Joan Robinson calls it perfect discrimination and it could only occur if each consumer buys only one unit of the product and is forced to pay a price which represents his maximum offer for it.
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Discrimination of the first degree is an extreme case. It could occur only where a monopolist has a few buyers only and where he is shrewd enough to see the maximum prices they will pay.
Discrimination of the second degree would occur if a monopolist was able to make N separate prices in such a way that all units with a demand price greater than X were sold at a price X, all with a demand price less than X and greater than Y, at a price Y and so on.
Whereas under discrimination of the first degree no amount of consumer’s surplus is left to the buyer, under discrimination of the second degree, buyers may enjoy some degree of consumer’s surplus.
This sort of price discrimination would occur if each buyer had a perfectly inelastic demand for the goods below and above a certain price.
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Price discrimination of the second degree is explained in Fig. 12. DD’ is the market demand curve and Math unit of the product has a demand price MP and earlier units have a demand price greater than MP, as is indicated by the DP portion of the market demand curve. All the OM units of the output will be sold at MP Price.
Thus, on Math unit, no consumer’s surplus will be enjoyed by the buyer but on earlier units, the buyers would enjoy consumer’s surplus.
Similarly for Math unit demand price M’P’ but for all other units between M and M’ the demand price is greater than M’P’. All the units between M and M’ are sold at price M’P’. Thus, on M’p’ unit, no consumer’s surplus will be enjoyed by the buyer but on all other units between M and M’, buyers would enjoy some consumer’s surplus.
Discrimination of the third degree is said to occur when the seller divides his buyers into two or more sub-markets and charges different prices in different sub-markets. The price charged in a sub-market need not be the lowest demand price of that sub-market.
The price charged in each sub-market depends upon the output sold in that sub-market and the demand conditions of that sub-market.
Price discrimination of the third degree is most common. A common example of such discrimination is found in the practice of a manufacturer who sells his goods at a higher price at home and at a lower price abroad. s