What is a discriminating monopoly?

A discriminatory monopoly is a company that dominates the market and charges different prices, usually without much relation to the cost of providing the product or service, to different consumers.

A firm that operates as a discriminatory monopoly using its position of market control can do so as long as there are price elasticity differences of demand between consumers or markets and barriers to prevent consumers from realizing a arbitrage profit by selling them. By addressing each type of customer, the monopoly makes more profit.

Key points to remember

  • A discriminatory monopoly is a monopoly company that charges different prices to different segments of its customer base.
  • An online retailer may charge buyers in wealthier zip codes higher and prices lower than those in poorer areas.
  • By targeting each type of customer, the monopoly is able to make a bigger profit.
  • Price discrimination is only achieved through the monopoly status of the enterprise to control prices and production without competition.

How discriminatory monopolies work

A discriminatory monopoly can work in a number of ways. A retailer, for example, may set different prices for the products it sells based on the demographics and location of its customer base. For example, a store that operates in an affluent neighborhood may charge a higher rate compared to a store located in a low-income neighborhood.

Price differentials can also be found at the city, state, or region level. The cost of a pizza slice in a large metropolitan city can be tailored to the expected income levels in that city.

The pricing of some service companies may change based on external events such as vacations or hosting concerts or major sporting events. For example, auto services and hotels may increase their rates on dates when conferences are held in town due to increased demand caused by an influx of visitors.

Housing prices and rents can also fall under the effects of a discriminatory monopoly. Apartments with the same square footage and comparable amenities can have drastically different prices depending on where they are located. The owner, who can maintain a portfolio of multiple properties, could set a higher rental price for units closer to popular downtown areas or near businesses that pay substantial salaries to their employees. Renters with higher incomes are expected to be willing to pay higher rental fees compared to less desirable locations.

Example of discriminating monopoly

An example of a discriminatory monopoly is the airline monopoly. Airlines frequently sell various seats at various prices depending on demand.

When a new flight is scheduled, airlines tend to lower ticket prices to increase demand. Once a sufficient number of tickets are sold, the price of the tickets increases and the airline tries to fill the remainder of the flight at the higher price.

Finally, when the flight date approaches, the airline will again lower the price of tickets to fill the remaining seats. From a cost perspective, the break-even point of the flight is unchanged and the airline changes the price of the flight to increase and maximize profits.

Can a company operate as a discriminating monopoly?

In short, no. Price discrimination is generally only achievable when the entity serves different market segments with varying price elasticities and faces limited competition. After all, higher prices for some customers will likely only have the desired effect if there is no one else charging less for the same product or service.

It is possible that several rival companies will implement similar pricing strategies depending on location and general industry demand. However, the risk here is that the competitors are constantly trying to cut each other down in order to get more business.

What are the common examples of discriminatory monopoly?

Discriminatory monopolies are part of our daily life. Stores, restaurants, and properties, for example, often tend to cost more in areas with higher populations.
wealthy people. If a business can get away with charging more, there’s a good chance they will.

Is Price Discrimination a Profitable Strategy?

For a discriminating monopoly to work, the profit from the separation of markets must be greater than if the same prices were applied to everyone. In theory, matching prices to specific areas of a company’s customer base is a great way to maximize profits. However, if such a strategy is not carefully monitored and managed, and the right conditions do not exist, it could easily backfire.

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