Question

2. Explain why a third-degree price discriminating monopolist must be able to prevent resale and arbitrage for the model to be a workable one.

Answer 1

MONOPOLY

Monopoly exists when one firm is the single seller of a product which has no close substitute. 'mono' means one and 'poly' means seller.Three conditions for monopoly :

(1)single producer

(2)no close substitute for the product

(3)strong barrier to enter the industry

PRICE DISCRIMINATION

Price discrimination raise economic welfare since everyone gets commodity at their willingness to pay and no one is left out.It increases the profit of the monopolist.

There are three degrees discrimination

(1) FIRST DEGREE PRICE DISCRIMINATION

(2)SECOND DEGREE PRICE DISCRIMINATION

(3)THIRD DEGREE PRICE DISCRIMINATION

Third degree price discrimination;

Here, the seller divides his buyer into two or more sub-markets depending on the demand conditions.

example: dumping

Dumping is an international price discrimination. The producer sells a commodity in a foreign country at a price lower than the domestic price. Dumping is possible because domestic and foreign markets are seperated by large geographical distance.Here, the discriminating monopolist is faced with two market conditions;

(i)Export market which is competitive

(ii)Domestic market which is monopoly

The producer charges a high price in the domestic market and sells at a lower price in the foreign market due to competitive conditions.There are legal framework against dumping sine it is considered as an evil because , supply of goods at a lower price may damage the domestic industry.