Conditions or requirments for price discrimination.

A profitable and effective price discrimination needs the following conditions to be fulfilled :

1. Monopoly firm : The firm should be a monopolist.There is perfect knowledge and perfect mobility in perfect competition beside the existence of a large number of sellers.Hence,price discrimination is not possible on perfect competition.
2. Market segmentation :The seller must be able to segment the total market by segregating buyers into groups or sub markets according to elasticity.For example,if the buyers can be divided into rich and poor,national and foreigners,they can be changed different prices.
3. Market sealing :The resale of the commodity is not possible or is banned.The sellers must able to prevent any significant resale of goods form lower to higher prices bus-markets.Any leakage in the form of resale by buyers between sub-markets will tend to neutralise the effect of differential prices.For example,the services of doctors,lawyers cannot be resold.Likewise,the domestic buyers may not be allowed to sell some products in foreign markets buyers due to difference in income,location,available alternatives,tastes and other factors.In general,high price is changed in the market having inelastic demand and law price is changed in the market having elastic demand.
   

Discriminating Monopoly or Price Discrimination.

In simple monopoly,the seller changes uniform price for all of output or changes same price to all customers.But if he changes different prices to different bovers at the same time for the same product,it is called price discrimination or discriminating monopoly.According to J.I.Pappas and E.F.Brighm - "In a general sense,price discrimination can be said exist whenever different classes customers are charged different prices for the same product."
In the world of A. Koutsoyiannis - "Price discrimination exists when same product is sold at different prices to different buyers."
Likewise, Mrs.Joan Robinson observe -"The art of selling the same article under a single control at different prices to different buyers is known as price discrimination."
The example of price discrimination can be found in service industries of lawyers,doctors,.They may charge different prices to the poor and rich on the basis of economic condition also can discriminate price.since a monopolist has sole control over the supply of a commodity,he can easily discriminate price.The different types of discounts provided to the customers is also a kind of price discrimination.

The price discrimination is made with following objectives :

1. Profit maximisation :The business enterprises discriminate price to maximise profit from the sale of their outputs.
2. Social justice :Price discrimination may be made to protect some classes of people such as women,children,old and poor.
3. Capture the market : Sometimes price discrimination is made to capture the market and to crush the rivals.
   

Conditions necessary for pure monopoly.

The following conditions are necessary for pure monopoly :

1. Single seller : There exist only one seller or producer of the product.He has control over supply of the product.Monopoly may be in the form of individual owner or join stock company.
2. Absence of close substitutes : There should not exist any close substitute of the product.Because,if there are substitutes,competition prevail and monopoly disappears.Bober opined -"As the one seller,he may be a king without a crown.The cross elasticity between the product of the monopolist and any other producer must be small if not zero.
3. Restriction on the entry of new firms : There is strong barrier in the entry of new firms.Hence the existing firm has sole control over the supply.Due to this feature,the monopolist earns abnormal profit both in the short run as well as in the long run.

The pure monopoly existing only in economics theory.Because,there cannot be only firm producing a good.Similarly,a firm is not completely free from competition of close substitutes.In modern days of free enterprises economy,even in public utilities like electricity,postal service,telephone,water supply we can find some sort of competition.In Nepal as well different sectors which enjoyed traditional monopoly like airline,electricity,water supply,postal service are rapidly breaking up due to the liberalisation policy of the government.But the study of monopoly is necessary to know the economies of regulation which is signification for business mangers.

Meaning of monopoly.

Perfect competition and pure monopoly are two extreme forms of market structure.They are polar opposite.In perfect competition there are large number of buyers and sellers while in monopoly the seller is only one but the buyers are many.These both forms of market can be rarely found in the real world.The monopoly is a single seller or producer of his product.Since,there is only one firm there is no difference between a firm and industry in the monopoly market.
A monopoly refers to a single firm which has control over the supply which has no close substitutes.In the worlds of C.E. Ferguson -" A pure monopoly exists when there is only one producer in the market."
According to A.Koutsoyiannis -"Monopoly is a market structure in which there is a single seller, there are no close substitutes for the commodity it produces and there are barriers to sentry." For example a hotel or a bank in a remote village commands monopoly power.Likewise,public utilities like telecommunication,electricity supply,drinking water supply,postal service are the example of pure monopoly.This kind of monopoly has been called 'absolute monopoly' by Sraffa.In reality,pure monopoly is a myth which is found rarely in the real world.In the real world,only imperfect monopoly can be found where the monopoly has to face substitutes.For example,Nepal electricity authority may be called a imperfect monopoly since it has to face competition of distance substitutes like kerosene,petrol,gas,candle in different uses.

Pricing under perfect competition.

Equilibrium of firm and industry :The following three conditions should be fulfilled for an industry to be equilibrium :

1. The quantity demanded and supplied of the commodity produced by the industry should be equal.Because,if demand and supply are not equal,three cannot be equilibrium price.For example, if supply is higher than supply,the price tends to rise and if supply is higher than demand,price tends to fail.
2. All firms must be in equilibrium.The firm will be in equilibrium when marginal revenue equals marginal cost and the MC curve cuts the MR curve from below.
3. There should be no tendency on firms to enter or leave the industry.The tendency does not exit when all the firms are earning only normal profit.The firm earn normal profit when average revenue equals average cots.The normal profit is just sufficient to retain the firms in industry.If the firms are earning abnormal profit ,there is tendency on new firms to enter the industry.On the other hand,if the firms are increasing losses,there is tendency on firms to leave the industry.The situation of earning normal profit is called full equilibrium.

Short-run equilibrium :
The three conditions necessary for industry equilibrium mentioned above are fulfilled in the long run.The third condition need not be fulfilled in the short run.Because,in the short run there in no possibility of new firm entering the industry and exiting firm leaving the industry.
There are two approaches to show equilibrium of a firm : total revenue - total cost approach and marginal revenue - marginal cost approach.

Total revenue - Total cost approach :
The aim of the firm is to maximise profit.So the firm will be in equilibrium when it maximises profit.Profit is the difference between TR from sales and total cost of operation.Profit is maximum for the rate of output that maximises the excess of revenue over cost.

conditions of perfect competition

The following conditions are to be fulfilled for a perfect competition market :

1. Small size,large number :These should exist large number of buyers and sellers in the market.They cannot exert influence on price.The consumer taken individually is unimportant.He cannot get special facilities from the sellers,such as credit,free service,discount etc.
2. Homogeneous product : All firms product homogeneous product.Their products are identical.The products are perfect substitutes of each other.The cross elasticity between the products of the firms is infinite.Since products are homogeneous ,a single firm cannot affect price.The buyers are also indifferent as to the firm they purchase.
3. Free mobility of resources :All resources are perfectly mobile.It implies that each resources can move in and out of market readily in response to reactionary signals.The implies that the required labour skills are few,simple and easily learned.Free mobility also means that the inputs are not monopolised by a producer or an owner.
4. Free entry and exit of firms :The new firms can enter and leave the industry without any difficulty.This condition is very difficult to realise in practice.The absence of barrier in entry and exit applies only in the long run.In the short run entry and exit is not possible.
5. Perfect knowledge :The consumers,producers and resources owners must have perfect knowledge,about the market.The consumers should know the market price.If not,they might buy at higher prices even when lower prices are available.There will then not be uniform price in the market.If they have perfect knowledge about the prevailing price,the not more than the prevailing price.

The producers need to know both costs as well price in order to produce the profitable rate of output.The sellers will not charge more than prevailing price.If they charge higher price,they Will have to loss the customers.Thus,due to the complete knowledge,a price prevails in the market.
Similarly,the resources owners should have perfect knowledge of the market.For example,if labourers do not know the wags rates offered,they may not sell their labour services to the highest bidders.
Besides these factors,ti is also assumed that is the absence of transport cost.The objectives of the firm is to maximise profit and that of consumer is to maximise utility.There are no government intervention in the form of tax or subsidy.
These requirements show that no market can be perfectly competitive.Even in agriculture market,the requirement of 'perfect knowledge' cannot be fulfilled due to vagaries of whether conditions.

Significance of the law

Despite the weakness,the law of variable proportion in universal in application.Marshall and his followers believed that the law of increasing returns is applicable in manufacturing industries while the law of diminishing returns is applicable in agriculture.But this is not true.When a factor is increased keeping constant the other factors,the level of technology being held constant the product definitely decrease both in agriculture and industry.
This law has proved to be true empirical evidence.As opined by Fritz Machlup - "That people do not grow all the crops they want in just a few little flower pots is sufficient proof for the existence of diminishing returns."According to R.C. Lipsey -"Indeed,were the hypothesis of diminishing returns incorrect,there would need it a food crisis."The improvement in technology can postpone the operation of this law for the time being but cannot completely check the operation of this law.
It is be noted that although this is applicable equally in both agriculture and manufacturing,the operation of the law of diminishing returns can be postponed in manufacturing due to rapid development technology.But,the law operates due to the predominance of nature.
The law of diminishing returns operates in industry in a country like Nepal due to the non-development or slow development of technology.It some of the developing countries cost is decreasing and out put is increasing due to the development of technology.But the operation of this law is inevitable if 'technology remains constant' as assumed by this theory.Hence,the increase in production is necessary to meet the demand of growing population.
The law of variable proportion is of special significance in economic theory.Because some of the laws of economics are based directly on this law.For example,the Ricardian theory of rent and the Malthusian theory of population are based on this law.According to Ricardo since the law of diminishing returns operates in agriculture,even inferior land should be cultivated.On account of this superior by the growing population cannot be met due to the operation of the law of diminishing returns in agriculture.He has thus pointed out the need to check population by various methods.