Price discrimination in the conditions of the transnational company
Transnational corporations, possessing considerable market power, can receive increased profit by setting different prices for the same product sold to different buyers.
■ Price discrimination - the practice of establishing different prices for the same product or services, not caused by any differences in costs.
For the company to carry out such a policy, two basic conditions are necessary:
- the exclusion of free movement of purchased goods from the cheap market to the road for the purpose of resale;
- the ability of the seller to divide buyers into groups in accordance with their elasticity of demand for goods, and so that the "wealthy" buyers (buyers with inelastic demand) still bought the goods at high prices, without "running over" for more cheap the market for this product, characterized by a more elastic demand.
Note: For the sake of justice, it should be noted that price discrimination is not unique to a transnational corporation. Any company, if it is able to divide potential buyers depending on the elasticity of their demand (and they do not have the opportunity to resell purchased products), sooner or later faces the temptation to use the strategy of price discrimination.
There are two main types of price discrimination: absolute (perfect) discrimination and discrimination in divided markets.
Absolute discrimination is manifested in the fact that for each unit of produced goods of one name, a price is set equal to the demand price (Figure 21.4).
Fig. 21.4. The model of absolute price discrimination
This pricing policy is applied, as a rule, in the conditions of individual production, when the production and sale of a certain product is carried out on the orders of specific consumers. By resorting to such a strategy, the company extracts all consumer surpluses, "squeezing out" buyers to the limit and receiving as a result of the highest possible profit. Let us verify this by referring to Fig. 21.4. The optimal volume of production for a monopoly company is . If the monopoly starts to implement absolute price discrimination, then it will produce and sell products at individual prices . Graphically, the curve of the marginal income MR of a monopolist dealing with price discrimination of a given type will coincide with his curve D, and obstacles to increasing production volumes are eliminated (in the conditions of a simple monopoly, the producer, in order to increase the volume of production, had to lower the price for all of its products).
In this case, a firm can increase the volume of its output beyond and bring it to , which corresponds to the conditions perfect competition .
However, unlike the market of perfect competition, where each product is sold at a single price (Р6), the monopoly firm will sell its products at individual prices, which will allow it to appropriate the entire consumer surplus of its customers.
Discrimination in divided markets involves the separation of buyers into separate groups or markets, where their selling price is set. When carrying out such a price policy, it is especially important that the free movement of purchased goods or services between the markets is excluded and the demand for each of them does not depend on prices established in another market. Most often this discrimination is used in cases where markets are geographically separated or through customs barriers, i.e. in the conditions of functioning of the absolute majority of transnational companies. In both cases, the resale of goods here is expensive, which is an obstacle to their movement between foreign and domestic markets for this product.
In carrying out discriminatory policies, the monopolist sets the price and volume of sales at such a level that the marginal revenue from the sale of additional products in all markets is the same. The condition of profit maximization in this case can be written in the form
where - markets for the goods being sold (services).
Price discrimination in the conditions of international trade will be illustrated using a graphical model (Figure 21.5).
Having graphs of domestic and foreign demand (or average income curves) and img src="images/image433.jpg">, you can get the corresponding marginal revenue curves and .
For a common solution to the problems of maximizing the profit of a firm, "working" in the domestic and foreign markets, it is necessary:
1) determine the function of the total (for the whole company) marginal revenue MR, by doing the horizontal addition of functions and (Figure 21.5, c);
2) determine the parameters of the intersection of the marginal income curves of firm MR and its marginal costs MS, maximizing the firm's profit: Q E , MS, MR;
Fig. 21.5. The model of price discrimination in terms of foreign trade: a - the domestic market; b is the external market; in - marginal: income and costs
3) in accordance with the parameters of general equilibrium found in point 2, determine the price and quantity characteristics of internal (Rvn, Qvn) and external (Rin, Qin) markets.
So, if the firm has more monopoly power on the domestic market than on the foreign market, and domestic consumers have no alternative to buying this product at a lower price abroad, then the low prices of the exported goods will correspond to the maximization of the company's profits. If these conditions are met, the firm can be enriched at the expense of its customers in the domestic market.
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