Economics – Product Differentiation in Monopoly

Monopolies are firms that are the sole or dominant suppliers of a good or service in a given market. And what sets apart monopolies from competitive firms is “market power”- the ability of a firm to affect the market price. Price discrimination is the business practice of selling the same good at different prices to different customers, even though the cost of production is the same for all customers. Only monopolies can practice price discrimination, because otherwise competition would prevent price discrimination.

Price discrimination increases the monopolist’s profits, reduces the consumer surplus and reduces the deadweight loss. (the buyers of the lower-priced product should not be able to resell the product to the higher-priced market. Otherwise, the monopoly will not be able to maintain price differentials. ) The monopolist must be able to identify segments of the market that are willing to pay different prices, and then market its products accordingly. A common technique to achieve this is by making it harder to get the lower prices, since wealthier consumers value their time more than their money.

Some ways the monopolistic firms can implement discriminatory pricing are; •Linear Approximation Technique or Markup Pricing Technique •Personalized Pricing – extracting the maximum amount a customer is willing to pay for the product. •Coupons and Rebates – providing coupons to attract more customers or providing personalized discounts.

•Bulk pricing – offering lower prices when customer buys a huge quantity of the same product. •Bundling – joining products or services together in order to sell them as a single combined unit. Block pricing – Charging more for the first set of the product, then less for each additional product bought by the same consumer. •Group Pricing- charging different customers different price based on factors such as race, gender, age, abilities etc. and also “psychographic segmentation”- dividing consumers based on their lifestyle, personality, values, and social class.

•Charging different prices based on geographic location. Some products may be cheaper to produce in different places and based on the cost of the good sold the monopolistic firm can charge different prices in order to maximize its profits. Placing restrictions or other “inferior” characteristics on the low-price good or service, so as to make it sufficiently less attractive to the high price segment •Establishing a schedule of “volume discounts” (“block pricing”) such that only large-volume buyers (who may have more elastic demands) qualify •Using a two-part tariff, where the customer pays an up-front fee for the right to buy the product and then pays additional fees for each unit of the product consumed.